If you are falling behind in your mortgage payments, you are not alone. A recent report shows that foreclosure activity has increased in the top 10 major Metropolitan Areas. That means more and more homeowners are feeling the pinch of finances. What are the best strategies to follow to keep from losing the family home?
The best time to start preparing to deal with the bank is as soon as you have an indication that you are going to fall behind on your mortgage. Knowing what options your lender has available is a great piece of information to have so you can be prepared as the months go by and you are not able to make that mortgage payment.
Sadly, the vast majority of people wait until they are a few months behind before they contact their bank. They usually will contact the bank after they have received a late notice or an official “notice of default”. You may end up missing out on some of the benefits they have for those that call in before they default on their mortgage.
Let’s review two of the most often used programs lenders have so you can try to work things out with your lender and not lose your home.
Mortgage Forbearance
One of the first tools a lender has available to their borrowers who may be experiencing a hardship making their payments is a mortgage forbearance. A forbearance is a plan which may reduce your monthly payments by a certain amount, for a specified amount of time. These plans may also allow you to go without making any monthly payment at all for a period of time.
A forbearance plan may be anywhere from 3 to 6 months typically. Each bank/lender is different; therefore it is important that you check with your bank to see what they offer.
As a loss mitigation specialist, I worked with one of the largest banks in the nation during the height of the housing crisis. One of the biggest mistakes that I have seen people make is underestimating the extent of their hardship. Do not make that mistake. You need to be realistic in your earnings and expenditures.
All lenders will require you to complete a financial worksheet to evaluate your hardship level, which then determines how long your workout/forbearance plan will be. Many homeowners, in their attempt to get current as soon as possible, fail to include all their expenses on the worksheet they submit to the lender. Keep in mind that when you fall behind due to lack of income, you usually fall behind on more than just your mortgage. Make sure you take a complete inventory of your financial needs so that you can get the best plan available.
Many lenders/services will require the borrowers struggling to make their payment to complete a credit counseling workshop along the way. It is a very prudent step to take, even if the lender is not requiring you to take it. Completing a credit counseling course will help you get an in-depth view of your finances. I have found that those who go through this step perform better on their forbearance plans than those who do not.
One of the reasons why it is highly recommended that you do whatever is necessary to make sure you can perform on the forbearance plan as agreed is that most of the time you will only be able to qualify for a forbearance plan every so many months. Let’s say that you underestimate your needs and halfway through the plan you can’t keep up with the forbearance payments. The lender will not modify the plan and more than likely move your file to the next step in the foreclosure process. You can avoid this by making sure that first forbearance plan is one you can afford.
Many times, as mentioned earlier, homeowners try to qualify for a short plan so they can get caught up as soon as possible. Instead, you may be better off getting the longest, and most affordable plan possible. If your circumstances change and you can afford to bring your account current sooner, that is an option you always have. As cliche as it sounds, it is best to be safe than sorry.
Loan Modifications
Homeowners who are unable to bring their mortgage current using a forbearance plan need to contemplate other options to keep their home. A loan modification is usually the next step in the lender’s loss mitigation toolbox. Keep in mind that the bank has very little interest in foreclosing on your home. They are in the business of making money by way of interest, not by owning property.
When you work with the lender’s loss mitigation department, they have a variety of options to help you. Before a borrower is given a loan modification, the lender requires that a full financial worksheet be completed. Even if you have been in a forbearance plan before, you will need to complete a new financial analysis and a complete loan modification application. This is a far more formal process than a forbearance plan.
Typically, the documents you will have to present as part of the loan modification application are:
- Tax returns for the past two years.
- Paystubs covering the most recent 30 days.
- Copy of any SSI, Retirement or Pension payments you receive.
- Bank statements covering the most recent two months. You must submit all pages of the statements, even those that are blank.
- The most recent retirement statement.
- The most recent brokerage account statement or any investment accounts you may have.
- A detailed hardship letter. Banks are typically looking at these in great detail to determine the nature of the hardship. Is it permanent or temporary? Your letter needs to be able to convince a bank that you need the loan modification, and you can afford to pay a reasonable amount, enough to make it worthwhile for the lender to modify the loan instead of foreclosing on the property. Your letter also needs to be congruent with the documentation you are providing.
- The lender’s required loan modification application.
- Copies of mortgages or notes secured by the subject property.
- Copy of your property tax bill, your insurance policy and, if applicable, HomeOwner Association Dues.
This is a comprehensive list, for a reason. Lenders want to make sure they modify loans appropriately to the need and ability of the borrower. Failure to submit ALL their required documentation will only delay review of your loan modification request. Keep in mind that if you are behind on your payments, the foreclosure process continues until they have received a full loan modification package. It is not uncommon for borrowers to find themselves with their back against the wall thinking that as long as they are submitting documents, the foreclosure process stops. That is simply not the case.
A loan can be modified a number of different ways such as:
- Reducing the interest rate and lower the payment enough for homeowners to be able to afford based on their new circumstances.
- Adding any accrued back payments, late fees and other legal fees to the loan balance and re-amortizing the loan under a new note with a lower rate and payments. Oftentimes this is accomplished by extending the loan term to a 40 year loan with a balloon payment which can be in 20 or 30 years. This gives the borrower plenty of time to recover financially and perhaps even refinance the home if the modified loan terms are unacceptable after a period of time.
- Setting aside a portion of the loan as a “silent second” on which no payments are due for a period of time, or until the borrower sells or refinances the home.
- FHA loans have some special advantages. Under the HUD guidelines, your loan may qualify for an FHA Home Affordable Modification Program (FHA-HAMP). Under this program, you may qualify to have the mortgage insurance reduce your mortgage balance by up to 30% in order for you to be able to have affordable loan terms.
Many borrowers have faced financial hardship at one time or another. Lenders are aware and have special departments to help those in trouble keep their home. You need to be proactive though. Early conversations with your lender will help to make sure you have plenty of time to deal with the issue.