There are several options for homeowners experiencing difficulty paying their mortgage. What are they and how can they work for your situation?
loan modification: The lender modifies the terms of your loan by lowering your interest rate, fixing your interest rate if you’re in an adjustable-rate mortgage (ARM), or extending your loan term from 30 years to a 40-year term does. Your goal is to get your monthly payment to 31% of your gross (before tax) monthly income. To get started with this call your lender and ask them to consider your HAMP (Home Affordable Modification Program). This works best if you are currently employed in a position.
Tolerance: A lender takes the past due including fees and breaks it down into smaller payments over several months to help you make ends meet. Caution- you still have to make your regular mortgage payment on top of this. This is mostly for those who have had a short term loss of work or a short term illness that has been left behind but is able to catch up now or will in the near future. To get started with this option call your lender and inform them of your situation, but make sure you can afford the payments as well as your regular monthly payments.
Cell: Selling your home with an agent, even if you owe more on it than it’s currently worth. The lender pays the agents’ commission and the bank must approve the sale price. You need to be able to show 3 things: You have no assets (besides a 401k), you have a hardship, and you are late on your mortgage or you will be late soon if you don’t sell. A hardship can be illness, death of a loved one, divorce, unemployment, increase in payments (due to ARM), excessive debt, transfer of employment. Note: Some lenders like you will first need to go through the loan modification process. The new HAFA program is scheduled to begin in April of 2010.
deed in lieu of foreclosure: Often referred to as a friendly foreclosure. This must be approved by your lender and getting their approval can be difficult. How does this work? The lender lets you send them the keys and sign the deed to the bank. This can be harmful to your credit. Call you lender and ask them to explain their process. The bank can still go after you for any deficiency judgments later.
deed for leaseLoans backed by Fannie Mae and Freddie Mac may allow this option. Here you sign the deed and they allow you to rent back the property from them for a negotiated monthly rent.
foreclosure: Bank takes back the property. The house has been sold by the bank in an attempt to recover some of the outstanding balance. You can be pursued by the bank for a deficiency judgment.
The first step you should take if you’re having trouble paying your mortgage is to call your lender…let them know. Ask them to consider you for the HAMP loan modification program. Next, call a free consumer credit counselor and get their help in reviewing your financial situation so you know how much you can afford.
If you’re unemployed and don’t have the means to cover your mortgage, consider getting roommates or renting out your home and finding something more affordable. A short sale may enable you to get out of your payments and pay less rent until you are able to buy again. Most areas have housing assistance programs to provide financial assistance with housing expenses. Ask a friend or relative to stay with you until you get back on your feet. The key is to be proactive, know your options and work with your lender. Get a trained real estate agent if you decide to do a short sale. The worst thing in any case is nothing. Don’t let your home go into foreclosure, it can be emotionally painful and very damaging to your credit. There are many other options.