While it is true that the market has recovered throughout the U.S. since the housing bubble and prices bottomed out in 2012, it doesn’t mean that there aren’t still homeowners struggling to make their mortgage payments.
If you are one of the many Americans who is behind on a home mortgage, you need to understand what you can do to rectify the situation and ideally stay in your home.
A little history
When the value of your home drops below what you currently owe on your mortgage, it’s referred to as being “underwater.” ATTOM Data Solutions found that 9.6% of all U.S. mortgages were “seriously underwater” (the amount owed was at least 25% higher than the property value) at the end of 2016, down from 11.5% at the end of 2015, Realtytrac reported. The 5.4 million properties were the lowest level since ATTOM began tracking in 2012, and down from the peak of 12.8 million (29% of all properties) in the second quarter of 2012.
When the U.S. housing bubble began to burst, the federal government responded with a limited bailout to the housing market that included several programs to help homeowners who were unable to pay their mortgage debts.
These programs included the Making Home Affordable Program (MHA), launched by the U.S. Treasury in 2009 to help struggling homeowners avoid foreclosure. Its cornerstone, the Home Affordable Modification Program (HAMP), provided eligible homeowners the opportunity to reduce their monthly mortgage payments to more affordable levels.
These federal programs were allowed to expire Dec. 31, 2016, as the market bounced back. Fannie Mae and Freddie Mac have announced a new foreclosure prevention program, the Flex Modification program, but it is expected to take until Oct. 1, 2017, to be fully in place. It uses parts of HAMP to help struggling homeowners avoid foreclosure by providing a 20% payment reduction for eligible borrowers, Freddie Mac reports.
Other relief options for homeowners
Beyond the federal Flex Modification program (or if you don’t qualify for it), you have other tools available when faced with the inability to pay your mortgage. These include:
A loan modification is a request to modify your existing home loan because of your long-term inability to repay the loan. It is illegal for lenders to request upfront fees for home modifications.
This is a permanent change to your current home loan. It may mean reducing your interest rate, adjusting your monthly payment, or reducing the principal balance of your loan because of a decline in the value of the property.
Forbearance is a temporary stay of execution. The lender agrees not to foreclose and to accept a modified monthly payment or none at all for a limited period of not more than 18 months. You must have a good payment history and a reasonable expectation that you can resume normal payments in the near future.
If your home is in default, you may want to negotiate a reinstatement to stop foreclosure. A reinstatement requires you to make the loan current by paying all the money owed in a lump sum or sometimes in supplemental monthly payments in addition to remaining current on your regular monthly payment. This option is best if you are over any past financial difficulties and now have a substantial amount of money available.
A short sale is when you list your home (and hopefully sell it) at an amount below what is owed on the mortgage. You’ll want to list it as high as possible to ensure the lender will approve and so you can pay off as much of the mortgage balance as possible. The remaining balance, called the deficiency, may be forgiven or your lender may request you pay it.
Most lenders will only approve a short sale if you are behind on your mortgage payments or can show you will be unable to continue making your payments. While this might be a tough decision to make, selling your home short is better than foreclosure because it does less damage to your credit rating.
Deed in lieu of foreclosure
If other efforts fail, you may be able to give the property to your lender voluntarily, in exchange for the lender canceling the loan. This is called a deed in lieu of foreclosure.
For this exchange, the lender promises not to foreclose or to halt any current foreclosure actions. However, if they sell the property for a loss, they may request you pay the difference.
In a foreclosure, your lender takes legal action to take your home so they can sell it and pay off your loan.
There are two types of foreclosure. Judicial foreclosure is a court-ordered process, while non-judicial foreclosure is handled outside the court system.
Chapter 13 bankruptcy
Bankruptcy of any kind should always be the last resort. With that said, as a homeowner your option would be to file under Chapter 13, thereby protecting your home from foreclosure. The goal is to allow you to stay in your home while the court trustee helps to structure a repayment plan for all your debts – your home included.
Beware of Home Mortgage Scams
It’s easy to fall victim to unscrupulous people when you find yourself in a jam. Many homeowners, desperate to hold on to their property, have lost money to scammers who have made unsubstantiated promises. Some of the scams include:
- Thieves who pose as mortgage professionals or attorneys and pledge to modify or refinance your mortgage.
- Scammers claiming to be the new owner of your loan and con you into making your payments to them.
- Con artists who convince you to surrender your title to them temporarily, with the agreement that you will rent the home until you are ready to repurchase it.
Come up with a plan
If you are having problems making your mortgage payments, it is crucial for you to know what steps you can take to avoid losing your home.