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There are some financial problems that you know will be resolved in the near future. Paying off a court judgement or returning to work after a brief layoff, for instance, provides a definable end. It is easier to beg for a couple of months from your creditors if you have a plan for catching up. When the end is a long way off, however, you probably need to take more aggressive actions to save your home and your credit rating.
The best option during long-term financial difficulties may be to sell your home before the situation becomes a crisis. Sadly, too many people don't acknowledge their financial problems before the damage is done, or the problems occur at a time when houses take a long time to sell. Financial problems rarely solve themselves and the longer you wait, the worse they can get. Although you may feel like you have no control, the truth is that there are actions you can take to minimize the damage. Learning about the people you are dealing with and what options are available to you will give you an understanding of where you have the power to help yourself avoid foreclosure.
Your mortgage company is in the business of selling a service. That service is to provide the money for borrowers to purchase their homes. The lender expects to service a contract for a specific period of time (typically 15 to 30 years) for a fee (interest) that is included in the monthly payment. When the homeowner fails to make payments in a timely manner, the lender ceases to make money. Reading the details of the mortgage contract can let you know just how little tolerance a mortgagor will have for this. With payments seriously in arrears, it becomes the lender's right to protect his investment by pursuing repossession of the home through a legal process known as foreclosure.
Once in a delinquent situation, not every offered method of saving your home will be in your own best interest so you must consider the options carefully. Even if you are facing long-term financial problems, you still have options you can pursue in order to avoid getting yourself into a foreclosure situation.
The most important things to remember through it all is to keep in regular touch with your mortgage company, even if they act like they don't want to hear it, and to read every piece of mail you receive from them. To fail to do so will shut down some of your options.
For many people, it makes sense to refinance higher priced mortgages for a lower interest rate. There are some good reasons to do so. Watch out, though; since lenders are not required to provide advance advice for the total closing costs involved with a refinance, you will need to ask for a written estimate before signing any paperwork. As you review it, be aware that a significant monthly savings might be attractive for solving the immediate problem until you figure in the cost of the transaction. For example, the new rate might cut $120/month from the payments, but if the closing costs add up to $3600, you will have to stay in the house for more than three years before you begin to derive any benefits against the bottom line. These costs vary by lender, so it pays to shop around. Note, too, that if you wait until you are already seriously overdue on your house payments, you might not qualify for this option.
Before you decide to refinance it is wise for you to also contact your current mortgage holder to discuss the feasibility of modifying your current contract. These people are in the business of providing a loan so they can collect the interest and if you refinance with a different company, they are losing your business. You may need to be a little aggressive in this pursuit, but remember that your current customer status gives you some leverage. If you are turned away by the people you initially talk to or by a collection's agent, ask to speak to a staff member who handles loss mitigation.
People working in loss mitigation have the responsibility to minimize the loss of income to the company, such as occurs when the company forecloses on a home mortgage. Renegotiating your contract for a more competitive interest rate or to lower your payments by extending them over a longer period of time will not cost you as much as refinancing and may work to benefit both parties if it avoids foreclosure. While the lender is not likely to offer a rate as low as some you have heard about, the savings over paying closing costs could calculate out to be in your best interest.
In order to qualify for either mortgage modification or for refinancing, the property will usually have to be appraised to demonstrate to the lender that the value has not declined to a point that precludes their financing standards. Whether or not the mortgage modification is accepted, you will have to pay for the appraisal. In most cases, this is the only fee you will have to pay under a loan modification, which is what makes it significantly less expensive than refinancing. When refinancing, this amount can usually be folded into the new loan so you won't be out-of-pocket if your application is approved. Before you get the appraisal, it pays to ask your lender if a market analysis conducted by a local realtor would be acceptable instead of an appraisal. Many realtors will provide this service for free on the outside chance you will give them your business if you decide to sell.
As with any loan transaction, you will have to convince the lender that under the loan's new terms you have the ability to pay on time every month. Since you probably have only one shot at this, you should approach the lender knowing what both your long and short-term financial picture allows. Lenders will look at your debt-to-income ratios to make this determination. That is, they require that payments under the terms of a mortgage contract do not exceed 28% of your current family income and also that the total debt responsibility is not in excess of 36% of that income.
Here is how they figure it:
(Total family income x 28%)/12 = maximum monthly mortgage payment. If your family income is $32,000, then ($32,000 x 0.28)/12 = $747.
So, $747 per month is the most you can be expected to pay.
Likewise, your other debts like credit cards, car payments, and student loans must be taken into consideration. (Total family income x 36%)/12 = maximum monthly total of all debt payments. If your family income is $32,000, then ($32,000 x 0.36)/12 = $960.
This means that total payments for all indebtedness including the mortgage cannot be more than $960 per month.
Determining your income-to-debt ratios can help you know in advance what the maximum amount your mortgage payment can be approved for. If you request a payment plan within these parameters, you stand a better chance of getting what you ask for. At the least, knowing where this information can provide an informed guide for decisions regarding future action.
Despite your best efforts, if you fall into arrears on your mortgage payments, it is important to call your lender and work out a repayment plan immediately. Doing so protects one last possible option for retaining home ownership. If, even under the terms of the new repayment plan, you cannot bring the overdue payments up-to-date and foreclosure appears to be imminent, help may be available in the form of an interest free partial claim loan from the Federal Department of Housing and Urban Development (HUD).
To be eligible for a partial claim loan you need to have an FHA insured mortgage, missed at least four but up to twelve mortgage payments, and have a valid, documented cause for your financial problems. If approved, this loan, issued in the form of a promissory note, will cover your missed payments plus all processing fees. No payments will be due on this loan until your entire mortgage has been paid off or until you no longer own the property. The HUD web site for frequently asked questions about the partial claim loan process can be found at: http://www.hud.gov/offices/hsg/sfh/nsc/faqpc.cfm
While the best laid financial planning cannot prevent unpleasant surprises from occurring, being aware of your options and deciding in advance what course of action you will take gives you the most control possible.
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