Managing Your Mortgage

by Brian Yui

SAN DIEGO, CA, September 12, 2006 —Interest rates have been on the rise and for many homeowners that may spell trouble. Whether you’re having difficulty making your payments due to a rate hike or a change in your personal finances, you may fear losing the home you’ve worked so hard to attain.

Losing your job or facing unanticipated expenses can happen to anyone, and may cause you to fall behind in your loan payments. When lenders provide money in a mortgage contract, they stipulate that they have the right to foreclose on the property, repossessing your home if you are in default on your loan.

The First Step

If you have missed a payment, talk to your lender. Nobody likes to admit that they’re in financial trouble, but you’ll have to swallow your pride and work with your lender towards a solution. Don’t ignore their letters or calls. Be assured that they won’t shrug their shoulders and give up; instead, they’ll pursue legal remedies to ensure that they recover their losses. When you contact your lender:
1. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses.
2. Stay in your home for now. You may not qualify for assistance if you abandon your property.
3. Contact a housing or credit counseling agency. The Department of Housing and Urban Development, 800-569-4287 or www.hud.gov can help you find a reputable counselor. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. Beware of credit counselors who charge high fees for their services. Use a HUD-approved agency that will offer you help for little or no charge.
Short-Term Options

The situation may look grim, but you do have some recourse. If you are behind in your payments but can guarantee a lump sum to bring your account current by a specific date, your mortgage may be eligible for Reinstatement.

If you have recently experienced a reduction in income or increase in living expenses, you may qualify for Special Forbearance. This would provide a temporary reduction in payments or a suspension of your payments for a short time.

Finally, you may be able to set up a Repayment Plan. If your account is past due, but you can now make payments, the lender might agree to let you catch up by adding a portion of the past due amount to your monthly payments until your account is current. Be honest with your lender. The surest way to lose your home is to make arrangements or a payment plan that you know you cannot keep.

Refinancing

Mortgage Modification is a written agreement between you and your lender that permanently changes the terms of your original loan to make your payments more affordable. For example, you can refinance to change an adjustable rate mortgage to a fixed rate, extend the number of years for repayment, and so on.

Predatory lenders often target people in dire financial straits. They usually offer bargain loans, promise mortgages to people with no credit or bad credit, and charge unnecessary costs like broker fees and pre-paid life insurance. Before you jump at refinancing with a lender whose offer is too good to be true, try to work with your original lender to refinance and resolve your payment predicament.

Long-Term Solutions

If catching up and making payments isn’t an option, or if you cannot or no longer want to keep your home, your lender can work with you to avoid foreclosure. Selling your home may be the best option. If you have equity in your home, selling it and downsizing is a great option. You’ll be able to cover the outstanding principal and interest due on your mortgage, and perhaps have some funds left over. If, on the other hand, you sell your house but the proceeds are less than the total amount owed on your mortgage, your lender may agree to a Short Payoff or Pre-foreclosure Sale. This means that they will write-off, or excuse, the portion of your debt that exceeds the net proceeds of the sale. Ultimately, this can be a more cost-effective option for your lender than repossessing your home and selling it themselves.

You may find a qualified buyer who wants to assume your loan. However, your original contract may specify a non-assumable mortgage. Your lender may be willing to change the terms to permit an assumption, allowing the buyer to take over your debt.

Finally, your lender may agree to a Deed-In-Lieu of Foreclosure. This will allow you to voluntarily transfer title of your home back to your lender in exchange for cancellation of your debt. Usually, you must attempt to sell the property for its fair market value for at least 3 months before a lender will consider this option.

These alternatives will have some impact on your credit rating, but will not damage it as much as a foreclosure, an important consideration if you plan to buy another home when your circumstances improve. Foreclosure is a serious legal action that indicates to potential lenders that you are a significant credit risk. Unfortunately, the record of foreclosure may be shown on your credit report for seven years, plus 180 days from the last time the account was paid as agreed. When deciding how to solve your mortgage woes, be sure to weigh the effect on your credit.