The lending bubble

A decade ago consumers were borrowing money without thinking. Their finances were stretched for no reason other than that they could. Lenders played along and gave out huge dollars without fully researching how the money would be repaid. It created havoc within the lending industry, and borrowers struggled with payments. According to the National Association of Realtors, in 2007, 12% of all residential sales were for vacation homes and 21% were for investment properties. Many people took on too much debt and now buyers are under financial strains trying to manage it.

Managing too much real estate debt

For anyone who is strapped, there are options. Government backed foreclosure programs are intended to save primary residences. Bankruptcy protection is on the rise. These are some ways to manage.

•Refinance loans. Mortgage rates are at an all time low, and homeowners in trouble should consider refinancing. A good refinance can at least trim a few hundred dollars off a mortgage payment. Of course, some homeowners, whose home’s value has declined considerably, may not have a refinance option. According to Milo Benningfield, financial advisor in San Francisco, “Typically, lending companies won’t offer a refinance loan for more than 80% of a home’s value. That leaves owners who owe, say $ 200,000 on a condo now worth $ 170,000 without the ability to refinance.”

•The short-sale. One can also exercise the option of a short sale. When a home’s sale price is less than the mortgage total, owners can ask the lender to accept sale proceeds, even when they are less than the total owed. Normally, it’s easier to short-sell a primary home. Chicago attorney Joseph Nery said, “They are being more flexible when they think the only other option will be the customer forecloses on the property.” He also added, “A lender may also try to recoup their shortfall by looking to borrowers’ other assets like equity in additional properties, savings, and even retirement accounts.”

•Modification. Loan modifications are becoming more popular recently with President Obama’s efforts to help troubled homeowners. Making a modification work relies heavily on the person borrowing money having the ability to prove their income is sufficient. Investors have decision making capabilities to reject or accept a modification. Nery added, “More modifications are happening, but they involve a reduction of principal or interest rate charges, or other changes like lengthening the term of the loan to make payments more affordable.”

•Bankruptcy. Some consumers are seeking bankruptcy protection to save their homes. Areas like Las Vegas are seeing soaring numbers when it comes to bankruptcies. The real estate market in Nevada is in bad shape, and a recent RealtyTrack survey indicated 60% of homes in NV are in default. Nery said, “Bankruptcy should be a last resort, but if someone reaches that point, they are no longer worried about their credit. They are in survival mode.”

Coping with copious debt

Borrowing money used to be a simple process. Lenders were quick to qualify consumers without thorough examinations of their finances. In today’s world, however, many people are struggling with that huge debt and looking for ways to manage. Though it is a difficult situation, there are ways to manage an overwhelming debt, but each one comes with its own problems to overcome.