Help for Homeowners Behind on Their Mortgage

There are many options for homeowners experiencing difficulty paying their mortgage. What are they and how might they work in your situation?

loan modification: The lender modifies the terms of your loan by either lowering your interest rate, locking in your interest rate if you have an adjustable rate mortgage (ARM), or extending the length of your loan from 30 to 40 years. The goal is for your monthly payment to reach 31% of your gross monthly income (before taxes). To get started on this, call your lender and ask them to consider you for HAMP (Home Affordable Modification Program). This works best if you are currently employed in some capacity.

Patience: A lender takes what’s past due, including fees, and breaks it up into smaller payments over several months to help you catch up. Watch out, you still have to make your regular mortgage payment on top of this. This is primarily for those with short-term job loss or short-term illness who fell behind but are now able to catch up or will be in the near future. To get started with this option, call your lender and let them know your situation, but make sure you can afford the payment PLUS your regular monthly payment.

dirty shorts: Selling your house with an agent even though you owe more than it is currently worth. The lender pays the agents’ commissions and the bank will have to approve the sale price. You must be able to prove 3 things: You have NO assets (other than a 401k), you are struggling and behind on your mortgage or will be behind soon if you don’t sell. A hardship could be illness, death of a loved one, divorce, unemployment, pay increase (due to ARM), extreme debt, job transfer. Note: Some lenders like you to go through the loan modification process first. The new HAFA program will start in April 2010.

Deed-in-Lieu of Foreclosure: Often referred to as friendly foreclosure. This must be approved by your lender and getting their approval can be difficult. How does it work? The lender allows you to send them the keys and sign the deed to the bank. This can be bad for your credit. Call your lender and ask them to explain their process to you. The bank can still pursue you for a deficiency judgment at a later time.

Deed of Lease: Loans backed by Fannie Mae and Freddie Mac may allow this option. Here you sign the deed and they allow you to rent the property to them for a negotiated monthly rent.

Mortgage’s trial: The bank recovers the property. The house is sold in an attempt to get the bank to recover part of what is owed to them. You can be prosecuted for a deficiency judgment by the bank.

The first step you should take if you are having trouble paying your mortgage is to call your lender…let them know. Ask them to consider you for the HAMP loan modification program. Then, call a free consumer debt counselor and get their help in reviewing your financial situation so you know what payment you can afford.

If you’re unemployed and can’t afford your mortgage, consider finding roommates or renting out your home and finding something more affordable. A short sale can allow you to get out of your payments and rent for less until you can buy again. There are housing assistance programs in most areas to offer financial help with housing expenses. Ask a friend or family member to let you stay with them until you can recover. The key is to be proactive, know your options, and work with your lender. If you decide to do a short sale, get a trained real estate agent. In any case, the worst that can be done is nothing. Don’t let your home go into foreclosure, it can be emotionally traumatic and very damaging to your credit. There are many other options.