What to do if you cannot afford your mortgage.
If you are having trouble making your monthly mortgage payments, there are several options available to help you get back on track. The following are the most helpful options which may best suit your needs:
- Loan Modification.
- Payoff or Reinstatement.
- Filing for Bankruptcy.
- Short Sale.
- Deed in Lieu of Foreclosure.
Loan Modification.In a Loan Modification, your lender can reduce your monthly mortgage payments by lowering your interest rate (as low as 2%) and/or by giving you a longer term to pay the loan (up to 40 years). If you have missed one or more mortgage payments, the bank can even place your past due payments on the back end of your loan and split that amount into manageable monthly payments rather than requiring that it all to be paid in one lump sum.
The two most readily available modification programs are the government sponsored "Home Affordable Modification Program" (HAMP) and the lenders' own modification programs, which are often referred to as "internal modifications" or "traditional modifications." Although not identical to the government HAMP program, many of the banks' internal modifications are fairly similar. The biggest difference between the two programs is that interest rates are typically reduced more under HAMP (as low as 2%) than under an internal modification which are generally reduced to the current national average interest rate.
You can get more information about the HAMP program frin the Making Homes Affordable website. The following are the most typical questions and answers about the program:
How do I know if I am qualified for a loan modification? In order to determine if a borrower is qualified for a loan modification, your lender will look at a number of factors. Although each lender and every loan is different, the basics of some of the more important factors are as follows:
- The Borrower's Debt-To-Income Ratio (DTI): The DTI is the single most important factor that will be considered by your bank in determining your eligibility for a modification. Simply, the DTI measures what percentage of your gross (pre-tax) income goes towards your mortgage each month. If you are paying more than 31% of your gross income on your first mortgage (including the principal, interest, taxes, insurance and homeowner's association dues), you may be qualified for a modification. Most lenders, however, will not modify your loan where the DTI exceeds 55%, but it is still worth checking with your particular lender. You can find your DTI by using the free calculator from credit.com.
- Primary or Secondary Residence? Most lenders are only willing to modify "primary" residences and will not modify a loan on a secondary residence or investment property. In other words, if you own the house but do not live there, the bank may not be willing to modify the loan on the property.
- First or Second Mortgage? Second mortgage lenders will typically wait until a first mortgage modification application is done before they will even think of modifying their own second loan. Lenders with second mortgages tend to make more extreme offers. They may offer very generous loan modifications or nothing at all. Because a second mortgage is a greater risk for the lender they are often more willing to work out a settlement agreement. You may be able to get them to take 10% off the remaining principal balance of the second mortgage to settle and permanently close the second mortgage. This is a great option for borrowers who have been refused a modification on their second loan, but requires that you have enough money to pay this 10% upfront or possibly have a family member who will pay it for you.
- Value of the Home. Your lender will be hesitant to modify what they consider expensive properties. The Obama administration has followed suit and will only consider HAMP modifications for first mortgages with a remaining principal balance equal to or less than $729,750.00.
- Can I get a modification if I am current on my mortgage? Although lenders will likely not openly admit it, most banks will refuse to modify your mortgage unless you are behind on your monthly payments. Purposely defaulting on your mortgage in order to increase your chances of receiving a modification, however, invites a whole host of additional problems. First, you do not automatically qualify for a loan modification just because you are late on your mortgage payments. Second, even one missed payment will have a negative impact on your credit score. Third, you will be responsible not only for repaying any missed payments, but also the late fees and interest that accrue. Fourth, and most importantly, if you default on your loan, the bank may seek to put you in foreclosure.
Payoff or Reinstatement.Payoff: A payoff is when you pay the lender the full amount owed on the loan plus interest and expenses. The payoff figure is the total amount required in order to satisfy the loan as "paid-in-full." This figure includes the remaining principal balance, plus any late fees, interest, attorneys fees (if the bank has commenced foreclosure proceedings against you), forced-placed insurance (called PMI), property inspection fees and maintenance costs. It is often larger than the original loan itself and is, therefore, often too much for most borrowers to pay.
If you have a family member who is willing to help you or suddenly come into a large sum of money such as from a lawsuit settlement, a payoff is your best option for keeping a good credit rating. You can even try to negotiate a clean credit report from the lender as part of the payoff.
Reinstatement: If you are behind on any mortgage payments, a Reinstatement is the amount necessary to put the loan up to date again. The reinstatement figure represents all of the past due payments plus late fees, interest and any other fees, such as attorney fees or court costs spent by the lender. This is a good option if you had a temporary hardship, but are now back on track with your finances. Simply call your lender and ask them for a "Reinstatement Letter." In today's economy, the lender may even be willing to accept less than the full Forbearance amount (see below) to reinstate the terms of your loan and discontinue any forecolsure action.
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Forbearance.A forbearance is a temporary program of usually six months in which the lender agrees to reduce or forgive a portion of your monthly payments. In some ways then, a forbearance is a like a temporary loan modification. However, at the end of the forbearance period, your original monthly payments will be restored and you may be required to pay an additional sum to make up for the portions of payments missed during the forbearance period. If the bank does not require you to make up the missed portions of payments, however, this forgiven sum of money may be considered "income" and subject to tax.
As with reinstatement, forbearance programs are a good option for those who are facing a temporary financial hardship.
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Filing for Bankruptcy.Filing for Bankruptcy will temporarily stop foreclosure proceedings and may even protect your home and other assets from creditors. If you have filed for Bankruptcy multiple times, however, you may lose the automatic stop put to a foreclosure. Bankruptcies have a huge impact on your credit and should only be used as a tool of last resort. It should also be done with the help of a Bankruptcy Attorney. For more information, see the Top of Page
Short Sale.The same economy which is making it difficult for you to pay your mortgage is most likely also making it impossible for you to sell your home. The value of your home may have dropped below the amount of your mortgage. Without some help, you would have to pay to sell your house.
Because this problem has become so common, lenders will seriously consider, and in some cases will be required by law, to agree to accept less than what you owe to allow you to sell your house and get out from under an unaffordable mortgage. This is called a Short Sale, and is likely to be a better choice than allowing your house to be sold at foreclosure.
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Deed in Lieu of Foreclosure.If you have been refused the above programs or have decided that you no longer want to save your home, you should consider a Deed in Lieu of Foreclosure. Although you would be giving up your property, it may be a better option than losing your home to a foreclosure sale, which has a tremendous negative impact on your credit.
If you have posted your property for sale with a real estate broker for at least 90 days without an approved sale, you may approach the bank regarding a Deed in Lieu of Foreclosure. Quite simply, with a deed in lieu, you surrender your deed to the bank and forever relinquish your ownership of the property. Doing so not only avoids having your home sold at a foreclosure auction, but also may protect the bank from coming after you for some or all of the money owed on the loan.