How to avoid foreclosure
We're not going to kid you.
It's very difficult to get a mortgage modification. Only about 15% of the people who try to do it on their own succeed.
Borrowers can spend months negotiating with customer service reps and documenting every aspect of their financial lives, only to have their requests abruptly denied.
Or to discover that their file has been lost.
Or to never get an answer at all.
Some people get a trial mortgage modification, but 90 days later they're told they don't qualify for a permanent one. If they can't come up with all back payments within 21 days, they're foreclosed on.
Then they lose their home anyway.
Every foreclosure prevention program the government creates to help homeowners modify or refinance unaffordable loans has been a flop. People are increasingly angry.
But getting angry won't save your home.
Here's what you should do if you have...
NO JOB AND NO WAY TO PAY A MORTGAGE.
Most lenders won't agree to long-term relief, such as reducing your interest rate, extending the length of the loan or refinancing the mortgage, for borrowers who are out of work because it's impossible to predict their future earnings.
If you're lucky, you'll qualify for what's called forbearance.
That allows you to make partial or no payments for up to six months with the understanding that you must make up the difference later.
The idea is to give you time to find a new job and get back on your financial feet.
If a new job pays significantly less than the one you had when you qualified for the mortgage, you can go back to your lender and ask for a modification that will permanently lower your payments to match your new income.
Our step-by-step advice on how to negotiate with your mortgage company can tell you what to ask for and expect.
A JOB, BUT A MORTGAGE YOU CAN'T AFFORD.
As long as you have a steady income, you can ask your lender to refinance or modify your loan.
If you think you could qualify for a modification, you have to try. Foreclosure not only takes your home and trashes your credit, but it allows lenders in most states to pursue you for all of the costs and losses they incur in repossessing and selling your home.
Before you invest time and money trying to get the terms of your loan changed, find out if you have any chance of getting one.
You'll have the best chance of getting a modification if:
- Your home has no equity; in other words, it's worth less than you owe. (If you have equity, banks expect you to sell and pay off the loan.)
- Your debt-to-income ratio is between 31% and around 55% -- high enough to make paying your mortgage difficult, but not so high that your debt is unmanageable even with a modification.
- You can verify all of your income.
- You're willing to go through a lengthy process that may require you to answer the same questions, and provide the same financial documents, over and over again.
The federal Making Home Affordable program, known as HAMP, was expected to help millions of financially strapped borrowers save their homes.
But the results have been disappointing.
Most mortgage modifications now are being made outside government programs. Bank of America, for example, is making seven deals outside the government programs for every one deal it makes through MHA.
Banks have found they'd rather skip the cash incentives they can get for modifying loans under the government programs than deal with the paperwork and rules they impose.
"Making Home Affordable is great politics for lawmakers and even better PR for banks," says David Bartel, president of Home Loan Advocates Inc. of Los Angeles, "But it's a huge failure for homeowners."
Even though you probably won't get a modification through a government program, you have to apply before you will be considered for the banks' in-house programs.
"You have to go through the HAMP program and get denied first," McGill says.
Homeowners apply for one of two programs:
Home Affordable Modification is for borrowers who are behind on their payments or in danger of missing payments and facing foreclosure.
That's where the lender agrees to lower the monthly payments by reducing the interest rate, extending the length of the loan or even forgiving some of the debt.
Home Affordable Refinance is for borrowers who are current on their payments but can't refinance out of high-cost loans because they don't have enough equity.
This moves you into an entirely new, fixed-rate loan.
If your house is worth considerably less than you owe on it, you may qualify for the FHA Short Refinance option for Underwater Loans that went into effect on September 7, 2010.
This program encourages restructuring into new FHA loans when lenders reduce the amount of original loans by at least 10%.
To qualify for an FHA Short Refinance, you must be current on your mortgage, and your existing loan must not be FHA insured.
Don't be surprised when your first try at getting a mortgage modification doesn't succeed.
"Expect to hear 'no' three or five times, but don't give up," says McGill. "You'll probably get an automatic denial. All you've got to do is regroup and resubmit."
From there, all the banks have different programs and guidelines.
Although you can try to cope with the tortuous process of figuring out the various programs and applying for help on your own, we recommend that you seek professional help.
- A member of the National Foundation for Credit Counseling, the nation's biggest and most reputable credit-counseling organization.
According to the Urban Institute, borrowers facing foreclosure are 60% more likely to hold onto their homes if they receive counseling. Plus, they end up with modified mortgage payments $454 lower on average than the payments of those who got mortgage modifications on their own.
- A real estate or bankruptcy attorney who specializes in foreclosure prevention.
An attorney has more clout with the bank and can do things you can't to help save your home.
In addition, an attorney can help you look at other options. For example, filing for bankruptcy can stop the foreclosure process and give you time to catch up on payments. Although judges cannot modify your primary mortgage, they can reduce other debts, freeing up money to spend on your mortgage.
To find an attorney who's an expert in preventing foreclosures, use the locator created by the American Board of Certification, a nonprofit group that tests and accredits lawyers.
Stay away from principal balance reduction companies, especially those that charge upfront fees and tell you to stop making your mortgage payments.
Just giving up on your house is not an option.
In states that allow deficiency judgments, lenders are pursuing them against a growing number of borrowers. They are seeking to recover the difference between what was owed on the loan and what the home ultimately sold for, plus costs.
They'll give you a few years to get back on your feet, then haul you into court demanding that you reimburse them for tens or even hundreds of thousands of dollars.
If you can't make your mortgage payments, don't delay in getting help.
"People wait too long," says Lee Jones, a spokesman for the U.S. Department of Housing and Urban Development. "They say, 'The sheriff is coming in four days, what should I do?' "
The earlier you seek help when you know you're having trouble paying your mortgage, the more options you have and the better your chances of working something out in your favor.