You can run, but you can’t hide.
You signed on the dotted line. Now every month it comes to get you.
It hits you every month. For some people, paying the mortgage isn’t a second thought. For others, it’s a daily challenge. Whether the economy blazes or struggles, the average American spends a large percentage of their paycheck on their mortgage – often times, more than half of the take home.
Fortunately, in the world where short sales account one out of five homes sold and foreclosures account for one in 136 homes in the U.S., there are programs that can give you relief and lower your mortgage payment. Sometimes these programs can lower your mortgage payment by a half or more.
1. Loan Modification
Probably the most popular method to stabilize your mortgage payment. It costs you nothing, but time, diligence, and patience. No matter what the bank tells you, modifications typically take 60-180 days for approval. Bear in mind, that many loan servicers do not own the note and only have the latitude given to them by investors (or note owners). Before you start, you want to check to see if you have a Fannie Mae or Freddie Mac that qualifies for the Obama Home Affordable Modification program and whether your lender is participating. If your lender is participating, follow the instructions on the government site. If not, contact your loan service and follow the steps below:
- Preliminary approval. Call your servicer and let them know you’re having trouble paying your mortgage and why. They can usually tell you if you prequalify by looking at your income and expenses, so have that info ready.
- Loan modification package. Shortly after, they should send you a loan modification package which usually includes a hardship letter, financial statement request, permission to run your credit, and other financial items they will use to approve you.
- Follow up. By far, the most important part of the steps. Be tenacious about following up. Loan servicers get a heavy volume of calls so you need to constantly call and see where you are in the modification process.
Just because you get preliminary qualification, doesn’t mean you’ll get final approval. In order for you to get approved you must pass all the requirements such as: the property must be owner occupied; loan needs to be originated before January 1, 2009; first lien must be less than $729,750; and it must meet the net present value (NPV) test.
The NPV test calculates the net present value of the cash flows from a modification and compares that to the NPV of the cash flows if foreclosure were pursued. If the NPV of a modification is greater than otherwise, then you’ll get the modification. If it is less, you may or may not get a modification at the discretion of the loan servicer. All things equal, the more your house value has dropped, the more you’re likely to qualify.
2. Homeowners Affordability Refinance Program (HARP)
If you don’t qualify for a modification, you might still be in luck. This is different from the Home Affordable Modification program above, in that it does not give you as much of a “break”. This is low cost (or in some cases, no cost) and does not have income verification or hardship letter requirements. If you have an interest only (IO) loan or a fixed rate principal and interest (P&I) loan over 5.5% you must call and see if you can save money. You can qualify for a better rate or better terms. In many cases going from an IO to P&I will increase your payment, but at least you can lock in a low rate and allow yourself future certainty that your payment will not go up.Remember, rates will only go up from here.
The kicker: These loans can go over 100-110% loan-to-value ratios, which NO banks will originate now. For many, this is the only option to keep your home in the long-run. This process is way more pleasant than a short sale or foreclosure and does not impact your credit.
3. Deed in Lieu of Foreclosure
Essentially, the lender takes title of the home and releases you of your obligation. However, this appears on your credit score and sometimes impacts your score like you had a foreclosure. These are less frequent as sometimes that could let borrowers off the hook too easily.
4. Silent Seconds (or Parking Principal)
In my experience, banks use this option sparingly. Essentially, the bank “parks” the principal and does not charge interest on this portion of the loan. For example, you have a jumbo loan of $400k. You negotiate with them and they agree to “park” $150k and only accrue interest on the remaining $250k. You still owe the parked principal in full.
5. Short Refinancing
The lender forgives some of the debt and allows you to refinance into something you can afford. Also, known as a mortgage “cram down”. This option, while it can be highly effective, is used less often by banks.
In this scenario the bank defers your interest payment and gives you time to get your stuff together. However, you are still responsible for all the interest deferred. This option only works if you have a temporary hardship. Because remember, to get back to even you have to pay current interest payments and all the back interest. This is a great scenario for the bank since there is absolutely no loss to them.
Important tips when negotiating with the bank:
Tip #1: Log everything. Log all of the interactions you have with the loan servicer, mortgage officer, loan coordinator, escrow agent, title agent, etc. The devil is in the details. It’s not enough to say you called on July 1st, 2010. You need the name of the representative you talked to; what they confirmed with you; what other items they need from you; and their phone number and email (if possible, some reps don’t give this out). That’s the only way to keep accountability. This way, you can always reference previous calls to exacting details and ask for explanations if needed. You should hope for the best in people, but sometimes people who have more experience in an area can weasel their way out of responsibility if you don’t diligently document correspondence.
Tip #2: Play dumb. Sometimes, you don’t want the bank to think that you know all the possibilities. They can get apprehensive and think you’re trying to game the system. Gaming the system is wrong. But, you should be mindful of these psychologies especially when working with smaller or community banks where they have a lot more latitude and judgment calls for workouts.
So give it a shot and see if some of these programs can work for you. Feel free to email success stories. Good luck!