How to Negotiate a Reduced Principle Mortgage Buyout With a Bank
Following the 2008 credit crisis, many consumers found themselves in financial difficulty. Home values plummeted, unemployment increased and some consumers found that they could no longer afford their mortgage payments. If you have an overwhelming mortgage payment and you are facing foreclosure, you might be able to negotiate a reduced principal buyout--also known as a short sale. This can be an advantageous program for all parties involved: the buyer, the seller and the lender. However, you must first negotiate the reduced principal with your lender.
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Things You'll Need
- Existing mortgage paperwork
- Income documents (W-2s, pay stubs)
- Mortgage statement
Instructions
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Reasons for hardship
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Write down all of your reasons for your financial hardship. This can include unemployment, disability, underemployment and falling home prices. You must also collect all the paperwork that relates to this hardship. Lenders will want to verify and corroborate your hardship claims. Find physician letters, unemployment checks or bank statements to confirm your financial difficulties.
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Calculate your own debt and income ratios. A lender will do this to determine your official financial hardship. First, calculate your debt-to-income ratio (DIR). To do this, divide the total of your monthly expenses by your gross monthly income and multiply the result by 100. Most lenders will not consider a reduced principal unless your DIR is well above 50 percent.
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Find a buyer to purchase your home at less than the amount owed. Banks and lenders usually will not consider a reduced principal buyout unless you have a buyer lined up to purchase the home. It is usually in the lender's best interest to proceed with a short sale as it avoids the lengthy, and often costly, process of foreclosure.
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Contact your lender armed with your financial records and hardship documents. Schedule a meeting to discuss the possibility of a short sale. You will need to emphasize your complete inability to pay the mortgage. Mortgage companies often shy away from foreclosures when it is avoidable.
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Offer a settlement figure. Do not simply ask for a lower amount. Come prepared with an estimated value of your home and use that as a guide when making an offer. You will likely need to counter the lender's counteroffer, too.
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Agree to a settlement figure that will relieve you of the mortgage debt after the short sale. The goal is to cover the full mortgage balance through a sale--not end up with a large personal loan for the difference.
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References
Resources
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