-- Q: I am the owner of one of these "subprime" mortgages everyone is so nervous about, and now I know why. I run a home-based business and care for my two school-aged daughters. I got what I thought was a great loan, but have learned the hard way that after 2 years, my mortgage goes up $180 a month! I am now on the verge of foreclosure and will lose my business, too. Help! — Layla
A: Like many other homeowners, home-based business owners also tapped the seemingly ever-increasing rise in property value and the corresponding low interest rates the past few years to refinance their homes and use the funds for either consumer spending, business growth and expenses, or both. But now it looks as if that may not have been such a great idea.
For instance, I know someone who ran his business from his home for a decade but who never quite made enough money to make ends meet. He began to use his credit cards to pay for business expenses, food for the family, and so on, and then, every other year or so, he refinanced his house, paid off the credit cards, and started over. But now he can't do that again because his house barely appreciated the past two years. So now he has two years of credit card debt, no equity, a ballooning mortgage payment, and no recourse in sight. What will he do? He is looking for a job.
When you are in over your head with your mortgage, when foreclosure is on the horizon, you have a few options, but I must tell you, none of them are great. Here are your choices:
Short sale:If you are on the verge of foreclosure, you would work with the bank to quickly sell the property – probably for less than its worth, but at least enough to cover the mortgage. It keeps the foreclosure off of your credit report, but that's about it.
Negotiate with the lender. Often your best bet is to try and workout some sort of arrangement with the lender. If you are in trouble with your loan, it is vital that you act quickly as once the foreclosure process begins, a statutory clock begins to tick and you only have a few months before your house is sold. You will have far more leverage if you contact the lender before the clock starts ticking. There are several things the lender may agree to:
•Modification: The lender may agree to lower the interest rate or to extend the terms. Why would they do that? It may beat having another default on the books.
•Repayment: Here, you would agree to terms that would allow you to catch up on unpaid payments by adding a portion of the past-due amount to your normal monthly payments.
•Forbearance: The lender may agree to have you temporarily stop making loan payments, while also coming up with a plan to bring the loan current.
Get counseling:If you have a VA loan, an FHA loan, or some other federally-guaranteed loan, you may be able to get some help from the office of Housing and Urban Development (HUD.)
File for bankruptcy:I have mentioned several times in this column previously why I think the new bankruptcy laws stink, and here is but another example. You have two options when it comes to bankruptcy, and they go from bad to worse:
•Chapter 7: It used to be that with a Chapter 7, you could eliminate all of you unsecured debt (like credit card debt), get some breathing room, and thereby keep your house because you would have more disposable income with which to catch up and stay current. However, under the new laws, eliminating that unsecured debt is very difficult. Usually, now, you will need to enter a repayment plan. Of course, if you could have repaid the debts, you would have. Bad.
•Chapter 13: This is the official repayment plan option, which includes past due mortgage amounts. Nice idea, but again, if you could have caught up, you would have, right? Worse.
Sometimes a bankruptcy will still work, and when it does, it is a blessing.
Sell the home. Finally, the best plan may just be to sell the house, recoup your equity, and move on.
I wish I had better choices for you, but I don't. Good luck.
Today's Tip:One last option: If you are behind but can see a way of staying current once you are caught up, consider borrowing the past due amount from friends or family. All due caveats apply, of course.
Ask an Expert appears Mondays. You can e-mail Steve Strauss at: email@example.com. And you can click here to see previous columns. Steven D. Strauss is a lawyer, author and speaker who specializes in small business and entrepreneurship. His latest book is The Small Business Bible. You can sign up for his free newsletter, "Small Business Success Secrets!" at his website —www.mrallbiz.com.