A House Payment You Can’t Afford
Not long ago, a senior, Frank, called me about his home. He explained, “I have been making my mortgage payments from my IRA. My social security is not enough to maintain the mortgage payment and leave me enough to live.” He explained that he had minimal equity. The extra retirement would not last forever. He was worried and didn’t know what to do.
I am the Executive Director of HELPS, a nationwide nonprofit law firm that educates seniors how they can maintain their financial independence. Many seniors have house payments they can’t afford. They have less income because of retirement or job loss. Perhaps a spouse passed away or other income was lost. Senior homeowners have options.
Many learn their home is too big or too much work to handle themselves. If they have equity, they can simply sell the home. A realtor can obtain a market analysis. If a sale would provide sufficient money after a realtors commission (usually 6%), then selling the home and obtaining less expensive housing might be a good option.
Seniors that have significant equity could investigate a reverse mortgage. A reverse mortgage pays off the existing mortgage. The senior then can live in the home without a house payment until they pass away. If there is enough equity, it is possilbe to have access to additional monies either in a monthly payment or line of credit. Seniors that qualify for a reverse mortgage can keep a home that otherwise they could never afford. You must be at least 62 and have a minimum of 55% equity in the home. For example, if the home is worth $100,000, then you can owe no more then $45,000. Upon your death heirs will have around a year to sell the home. The reverse is paid and they get the balance. Heirs are not responsible if the home doesn’t sell for a sufficient sum to pay the reverse.
What if there is little or no equity in the home? A senior can always stop making a house payment they can’t afford. That is what Frank decided. He realized that once his nest egg was gone, there would be nothing to show for it. He realized the house was simply too big. He wanted to preserve his retirement for his future needs.
When payments are not made, a house will eventually be foreclosed. Foreclosure is a legal process a lender must go through, to get the home back. It is generally a slow process. At HELPS we ahave seen seniors live in their homes without making a payment typically for a year and a half to three years before they move. A persons does not need to move when they stop payments. Mortgage lenders prefer persons to occupy the home while it is going through foreclosure. This gives time to save for a future move.
Will money be owed when the home is foreclosed? The short answer is, almost never. Some states allow for a judgment for excess money owed after aforeclosure sale,called a deficiency. This is rarely pursued by mortgage lenders. Furthermore, seniors social security and retirement income is protected by federal law- it can’t be taken from seniors.
If seniors don’t want to stay in the home they can contact a Realtor and attempt a “short sale,”which would avoid a foreclosure. That is when a mortgage lender agrees to accept a lesser sum when the home is sold. A lender can also be contacted about accepting a “deed in lieu of foreclosure,” where staying in the home is not a prioirty.
If there are two mortgages, and the senior can afford the first mortgage, stop paying the second mortgage might be a good option, A second mortgage will very seldom foreclosure if payments are stopped. The debt is still owed, but where remaining in the home is important, this can be one solution.
Loan modification is where the home buyer ends up with a lower payment they can afford. The Federal Home Affordable Modification Program, HAMP ended December 31,2016. Lenders often have their own private programs. Home loan modification is not guaranteed, nevertheless many homeowners are successful in modifying their mortgage obtaining a payment they can afford. Paperwork and patience is necessary when going through any loan modification.
Mortgage assistance programs are offered by some states. Google mortgage assistance programs and your state, to determine if there are programs where you live. Finally, keeping a home you can’t afford, should not be the end-all. Seniors have options. Even if in the end ,the home goes back, seniors I speak with, are almost always relieved to be free of the pressure of a payment they couldn’t afford.
By Eric Olsen Executive Director HELPS Nonprofit Law Firm, www.helpsishere.org