In the previous article we introduced this ‘Now What Do I Do?’ series, and discussed Option 1 – Sit Tight. That works if you can still afford the mortgage. If you can’t, we need to go to Option 2 – Loan Modification.
Banks and other mortgage lenders may be willing to consider a loan modification if you can’t afford your mortgage as it is now. What ‘loan modification’ means is that they may be willing to reduce the amount of your monthly payments, reduce the principal (the amount you owe), or both. There are two reasons they might be willing to do this:
1. If you can’t afford the current payment, you are probably going to default (get way behind or stop paying altogether) and they will have to foreclose. Foreclosure is not good. It takes a long time, and doesn’t recover much of the money they loaned you. If they take the property back at the foreclosure sale, then they have to fix it up and try to sell it. That takes more time and money, and they don’t really want to be in the real estate business anyway.
2. The second reason is that the government is pushing all mortgage lenders hard to make loan modifications that help people stay in their homes and helps them continue to make their (reduced) mortgage payments. And it would mean that your mortgage is would still be an earning asset for the bank, instead of a non-earning asset, and they wouldn’t have to report it in their loan loss category.
The name of the government program that fosters the Loan Modification programs is Home Affordable Modification Program (HAMP) and here is the HAMP website that will tell you a lot more about it, including how to tell if you qualify. Basically they figure that if your mortgage, taxes and insurance total more than 31% of your gross income, you are probably in trouble – and if so, you may be able to get a loan modification conversation going with your lender.
Part of the loan modification process will be a be a 3-month trial period that your lender will set up with you to help both of you to decide if you can keep up at the new payment level. If it works out, then the lender will modify the terms of your loan to fit the new plan.
To get started, what you need to do is call your lender, or whoever is the loan servicer that you currently send your mortgage payments too. If they are willing to consider a loan modification, and not all of them are, they will probably send you some forms to fill out about your income and assets, and ask for copies of things like pay stubs and bank statements. In essence, you are de-qualifying for your loan.
If you want to talk about this further, please give me a call. I understand that it is a very uncomfortable and private thing, but if I can help you sort through it, I will.
The caveat on all these programs is that your loan may not even be held by a lender who can make a decision. It may have been ‘securitized’ and packaged into a bundle of some kind that could have been sold to an investor almost anywhere in the world. It will take quite a bit of time to untangle the more complicated pieces of this mess.
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