If you are having trouble making the mortgage payments on an investment property (such as a home you rent or an apartment building you own), there are workout options available to help you avoid foreclosure. Read on to learn more about potential loss mitigation options for investment property mortgages.
Understanding Different Types of Property
It's important to understand the difference between a residence, second home, and investment property -- so you know which workout options apply to you.
Primary residence. A primary residence is where you live most of the time. It is your principal home.
Second home. Second homes are vacation homes or a dwelling where you spend a portion of the year. Generally, if you have a second-home mortgage, you cannot rent out the property or subject it to a timesharing arrangement.
Investment property. An investment property is a property that is not your primary residence and is purchased in order to:
- generate income
- generate profit from appreciation, or
- to take advantage of certain tax benefits.
Different types of investment properties include rental properties, commercial properties, and property purchased to “flip” (where the buyer purchases property with the goal of reselling it for a profit).
One workout option for investment property mortgages is a forbearance agreement. A forbearance agreement temporarily postpones or reduces your mortgage payments during a certain period of time. The lender agrees not to initiate a foreclosure during the forbearance period.
With this type of agreement, the lender retains the right to resume the foreclosure action if:
- you default on the forbearance agreemen
- the forbearance period expires and you haven't brought the loan current, or
- certain agreed upon conditions are not met.
Another workout option for investment property mortgages is a loan modification. With a loan modification, the lender may agree to:
- lower your monthly payment amount
- reduce your interest rate, and/or
- extend the amortization schedule.
HAMP Modifications for Rental Properties
If you own an investment property that is rented or available for rent year round, you may be eligible for a loan modification under the Home Affordable Modification Program (HAMP), which is part of the government’s Making Home Affordable initiative. To learn more about HAMP eligibility for rental properties, see our article Does HAMP Apply to Rental or Investment Property?
If you want to apply for a HAMP modification, contact your loan servicer to find out if it participates in the program. If you have additional questions about HAMP, or any other program under the Making Home Affordable initiative, you can call 1-888-995-HOPE (4673) or go to www.makinghomeaffordable.gov for more information. HAMP is scheduled to end on December 31, 2015.
With a short sale, the borrower sells the property for a price that is less than the total debt owed. The lender agrees to release its lien on the property and to accept the proceeds of the sale in full or partial satisfaction of the outstanding indebtedness. (Learn more about short sales to avoid foreclosure.)
The lender may be able to obtain a deficiency judgment by filing a lawsuit following the short sale, depending on the terms of the agreement. Generally, lenders are more likely to seek a deficiency judgment following the short sale of an investment property than with a residential property. (To learn more about deficiency judgments, see our topic area on deficiencies.)
Deeds in Lieu of Foreclosure
A deed in lieu of foreclosure is also an option for borrowers facing foreclosure of their investment property. A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title to the property. (Learn more about deeds in lieu of foreclosure.)
Borrowers are typically released from liability with deeds in lieu of foreclosure. However, if the property is severely underwater (where the value of the property is significantly less than the total debt), the lender may require an additional payment or insist it retain the right to seek a deficiency judgment. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt.
When to Hire an Attorney
Before you apply for any of these foreclosure alternatives, be sure to review your financials and update your budget. There are many legal intricacies involved in negotiating an investment property mortgage workout and it may be beneficial to employ the services of a qualified attorney to help you through the process and ensure that you fully understand all options.