Negotiating a Mortgage Debt Settlement With Your Lender

Mortgage debt settlement has become an increasingly popular concept, with rising foreclosures and government bailout programs designed to help struggling homeowners. Mortgage debt settlement can take one of two forms: you can restructure or modify your mortgage with your lender, adjusting the principle that you owe if you are underwater on your house, or you can arrange a short sale if you are underwater on your house. With the former, you keep your home while with the later, you sell your home. 

Understanding Mortgage Debt Settlement

Mortgage debt settlement is more difficult to negotiate than standard debt settlement, such as settling credit card debts, since a mortgage loan is a secured loan. Your home acts as collateral, so if you do not pay the full amount owed on the mortgage, the bank has the option of taking your home and selling it. However, if your property values have fallen, it is possible that you may end up owing more on your mortgage loan than the home is worth, so the bank will thus be unable to recoup the amount they loaned you if they foreclose and sell. When the bank knows you owe more than the house is worth and that they will not be getting their money back through a foreclosure, they may be more willing to allow for a mortgage debt settlement.

If you find yourself facing problems paying your mortgage and you want to settle your mortgage debt, you need to consider which of the two major options for settling mortgage debt is best for you. Generally, you can try to:

  • Renegotiate the terms of your mortgage. Usually, when you do this, the bank will try to get you to agree to pay back the full amount that you owe but will either lower your interest rate or stretch out your repayment terms so the monthly payment becomes more affordable. For example, if you owe $100,000, the bank may agree to let you pay back the full $100,000 over 40 years instead of 30, thus making your monthly payments each month more affordable but resulting in you paying back a larger amount in the long run due to paying an extra 10 years of interest. This is obviously better for the bank. However, in some rare cases, you may not want this and you may want the bank to actually agree to lower the total amount you owe so your debt is in line with the current value of your home. This may be possible, especially with government programs designed to encourage bailouts, but is more difficult to achieve. 
  • Short sell your home. This is the best alternative for those who don't want to keep the house. With a short sale, you get your bank to agree to let you sell the home for below the amount you owe, and to accept the full proceeds from the sale as satisfaction of the debt, forgiving the remaining balance. 

Getting Help

Deciding on how best to achieve mortgage debt settlement is complicated, and getting legal advice is important to make sure you make the best decision. Your lawyer can help you to decide how best to arrange a debt settlement and can work with your lender to arrive at a deal that works for you.

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