Q: In 2008, my husband and I got a large construction loan with a big box lender in order to build a new home. Our new home was appraised prior to construction (off the blueprints) at about twice the loan amount.
In April, 2009 our new home was complete and we were ready to convert the loan from a construction loan to a permanent loan. Our lender decided not to convert the loan because the appraised value of the home fell by about 70 percent, a value well below what we borrowed.
Recently our lender offered us 5.5 percent on a 30-year fixed-rate loan. We tried to get the bank to give us a lower rate because my husband’s income fell by 35 percent during this same time period.
Our debt to income ratio is over 50 percent, but the lender would not reduce the loan amount or the rate. The truth is we cannot afford the new payment because of my husband’s decrease in income and we have several investment properties that we’re holding. We have not been late on loan payments but the payment is due to increase soon and could push us into foreclosure.
We had an attorney review our closing documents last year. The attorney stated that nothing in our documents said that converting our loan was contingent on the property re-appraising out in value. In fact, the bank does not care about the appraised value because the home is upside down.
I need to see if we have a case, but I don’t know what we could base our case on. The interest rate that the bank is offering is the market interest rate. My husband is considering letting the house go because he does not think the value will ever come back to where we would have equity.
I need someone to please tell us if we have a chance of getting the loan or the rate reduced. I don’t understand why they would not at least help us with the rate. Someone told me to go ahead and convert which will then put us into a permanent loan. At that time, we could try to get them to modify after making a few payments.
I have heard so much information, however not sure what is actually accurate.
A: Your situation is precarious and there is not much information I can give you to help your situation. The reality is that your debt-to-income ratio is too high for the loans you carry and reducing your interest rate lower might not help you much. The only thing that would help you would be for the bank to forgive a good portion of the loan and give you a lower interest rate that could make the home affordable to you.
You have other costs for the home that are fixed and may not be reduced such as your insurance premiums, maintenance costs, utilities and real estate taxes. If the lender reduced the interest rate or even deferred a portion of the amount you owe and your debt to income ratio went down to 45 percent, you still might not be able to afford those payments.
You mentioned you have other investment properties. Are those investment properties bringing in money? If they aren’t, you might consider selling those properties to save the home.
However, if your husband is right and your decision to build the current property was in error and the value will never return – or at least won’t return for the foreseeable future – you might need to consider giving up the home and moving on.
You should know that most borrowers that have applied for assistance from lenders through either government programs or through bank programs that would modify loan terms or reduce interest rates have not obtained received offers they felt were helpful. Only a small fraction of borrowers have obtained loan modifications and lenders have been reluctant to reduce or defer any amount that is owed to the bank.
Given the banks’ reluctance to modify home loans or defer loan amounts, your best bet is to hope that the economy recovers and your husband’s income grows to where it was previously.
If you do not foresee his income coming back for the next several years, you might think about selling the home in a short sale, giving it back to the lender in a deed-in-lieu of foreclosure, walking away from the home in a strategic default move, or filing for bankruptcy to protect what you do have and might be able to keep.
As far as your “case” against the lender, the lender has offered you a loan to take out the construction loan and give you a market rate loan for 30 years. Your original loan documents might have contemplated that same loan. If the original documents contemplated a lower interest rate and set a lower interest rate for the permanent loan, you might want to talk to a real estate attorney to review the construction loan agreement or loan commitment to see if the bank was obligated to give you a lower interest loan.
But here again, the lower interest loan may only reduce your payments marginally. All of your other payments may be just as high and going higher.