Are you one of the 4.4 million U.S. homeowners who owe more on their house than the property is worth? Or have you found yourself in a short- or long-term financial crisis which makes it difficult to continue with your monthly mortgage payments? If so, you may need some form of mortgage relief.
What is mortgage relief?
Mortgage relief programs are designed to help homeowners who are struggling to pay their mortgages.
Some mortgage relief programs can help you get reduced interest rates, which will lower your monthly payments. Others could give you a break from making payments at all, which might help in the case of temporary unemployment or family medical issues. Some programs even wipe out a portion of your mortgage debt altogether.
Do you need mortgage relief?
If you are a homeowner who is current on payments but underwater (you owe more than the home’s value), you have a good chance of refinancing your mortgage.
But if you have fallen behind on your mortgage payments, applying for refinancing will be more challenging. If you are behind on your payments, you’re not alone. According to the most recent How Housing Matters Survey, nearly a third of Americans are spending more than the recommended 30% of their income on rent or mortgage payments. That same survey revealed that 34% of Americans either know someone or have themselves been foreclosed upon in the past five years.
If you’re missing payments, you’ll need to face the issue head-on with a mortgage relief plan, or you will soon have a foreclosure notice in the mail.
Understand your mortgage terms
Before you look at any mortgage relief programs, though, you should have a thorough understanding of your current loan.
- Fixed rate mortgage. This mortgage will have the same annual percentage rate (APR) for the life of the loan. The only reason that your payment might change is if there is an adjustment in taxes and insurance.
- Adjustable rate mortgage (ARM). This mortgage has an adjustable interest rate for the life of the loan, so your payments will go up and down based on a market index.
- Hybrid mortgage. A combination of both of the above, this mortgage is fixed for a specific number of years and then becomes an ARM. For example, a 2/28 hybrid loan has a fixed rate for the first two years and an adjustable rate for the remaining 28.
If rising APRs are driving your monthly payments up, find out if you can refinance your mortgage to a fixed rate loan. But before you do so, read through your contract. Many include prepayment penalties which might make refinancing more costly than it’s worth. Many include prepayment penalties that might make refinancing prohibitively costly.
Types of mortgage relief
Depending on your circumstances, you have several options for mortgage relief. These include:
Selling your home
The housing market has recovered considerably over the last several years, and many areas are once again considered seller’s markets. If you live in one of these areas, you may be able to sell your home, pay off your mortgage, and move on to a fresh start.
However, this option assumes that you’re above water on your mortgage, and that you have time to find a buyer before your debt climbs too high.
If you are willing to lose your home but live in an unfavorable real estate market, consider a short sale. This option allows you to sell your home in exchange for an immediate release from your mortgage.
With a short sale, the mortgage lender must agree to accept the home sale proceeds as full payment on your mortgage. Once closed, the lender releases their lien on the property, and your obligations are finished.
Signing a deed in lieu of foreclosure
Another option which lets you surrender your home to be released from your mortgage, a deed in lieu of foreclosure (DIL) lets you sign over your property to your lender.
In addition to releasing you from your debt, sometimes the lender will also give you a relocation incentive. They may allow you to remain in the home rent-free for several months, or lease the home back to you at market rates for up to a year.
A DIL is a good choice if you are underwater on your loan, behind on your payments, and ineligible for refinance.
When you are in danger of losing your home and are behind on your other debts, consider declaring bankruptcy. Bankruptcy is usually a last resort, but in this situation, it may allow you to keep your home.
With a Chapter 13 bankruptcy, the court appoints a trustee who will structure a debt repayment plan — which includes saving your home from foreclosure.
Chapter 13 is a valid choice if you want to keep your home but are weighed down by other debts. A Chapter 13 bankruptcy could discharge a second mortgage if you are underwater on your loans, and will help make your total payments more affordable. However, there are long-term negative credit rating implications tied to bankruptcy. You should talk to a bankruptcy lawyer before making the decision.
While it may sound easiest to wait for foreclosure and walk away from your home, this option comes with many negative long-term consequences.
If you are underwater on your loan after foreclosure, the mortgage company can still pursue you for the “deficiency balance” — the difference between the loan balance and their sales proceeds. Also, foreclosure will damage your credit and keep you from qualifying for another mortgage for as long as seven years.
A forbearance gives you a temporary break, where your mortgage payments are either reduced or suspended. This is a good option if you are experiencing a short-term financial hardship that you’ll resolve in a finite period of time.
Terms and qualifications for a forbearance vary by lender. Depending on your circumstances, you might have to pay the amount due once the forbearance period is up, or revise the past due amount through a loan modification.
Loan modification options
The purpose of a loan modification is to get your monthly mortgage payment to a permanently affordable level. Both lenders and the U.S. government define an “affordable” mortgage payment as 31% of your gross monthly income. For example, if you earn $4,300 a month, your loan might be modified to $1,333.
You can negotiate a loan modification with your mortgage lender. It’s in the lender’s interest to cooperate, since foreclosing on a home costs them of time and money. But if negotiations aren’t going smoothly, there are other loan modification options available.
Flex Modification Program
Offered by Fannie Mae and Freddie Mac, the Flex Modification Program offers payment relief to homeowners struggling to keep pace with their mortgage payments. Among other benefits, the program can lower mortgage payments by as much as 20% by adjusting a loan’s interest rate or duration.
To be eligible for Flex Modification, you must be late on fewer than three payments and must occupy the property as your primary residence. To submit an application, you will also have to submit an “eligible hardship” (i.e. unexpected medical costs or temporary unemployment).
For more information on the qualifications for Flex Modification, visit Freddie Mac’s fact sheet.
If you’re not eligible for the Flex Modification Program, you can try the government-run Hardest Hit Fund, or HHF. The U.S. Treasury created HHF in 2010 to help homeowners in the states hardest hit by the subprime mortgage crisis.
HHF has a total of just under $10 billion allocated to help with such things as mortgage payment assistance, principal reduction, and even relocation assistance to more affordable areas.
Mortgage reinstatement is the process of paying off your missed payments to make your mortgage current. In most cases, your lender will devise a repayment plan which lets you spread out this debt over an agreed period, to be paid off alongside your regular mortgage payments.
Mortgage reinstatement is a good option if you have the income to afford these increased monthly payments, or if you’re only slightly behind on your payments.
The mortgage relief process
The mortgage relief process can be tedious and complicated. When you call your mortgage lender, you will usually be passed along a long phone chain before reaching someone with the authority to discuss your loan. Come armed with patience, a pen and paper, and the following documentation:
- Documentation, such as recent pay stubs, of your monthly gross income.
- Copies of your recent tax returns.
- Your monthly mortgage statement.
- Information on additional mortgages or HELOCs.
- Savings and asset information.
- Account balances and minimum payments due on credit cards.
- List of other debts, including car loans, student loans, child support.
Tax implications of mortgage relief
When you pursue any debt relief, be sure that you understand the tax implications of being given a “break.” In some cases, when you receive a debt discharge, the IRS treats it as taxable income.
Watch out for scammers
Where there are people in financial straits, there are also scammers looking to take advantage of their desperation. A thief might pose as a mortgage professional or attorney, or claim to be the new owner of your loan to con you into making your payments to them.
It’s easy to fall victim to unscrupulous people when you find yourself in a jam. Look critically at any offers that seem too good to be true, and keep an eye out for these scams:
The lease/buy back
In this scam, a relief company convinces you to sign over the deed to your home; in exchange, they’ll let you keep living in the home as a renter. The agreement states that you’ll be able to buy back your home further down the line, when you are financially able. Unfortunately, the terms are so rigid that most renters get evicted, and that company ends up with your home.
Foreclosure prevention specialist
These “specialists” claim to be counselors who will help you avoid foreclosure. In exchange for some outrageous fees and all your personal financial data, they will make a couple of phone calls on your behalf which usually just postpone the inevitable.
Bait and switch
In the most brazen of these cons, a bait-and-switch-er will put paperwork in front of you, telling you that your signature will bring your mortgage current. Instead, you’ve just signed over the deed to your home and will likely receive an eviction notice shortly.
How can you avoid these scammers? Keep an eye out for the red flags. Federal law prohibits companies from accepting payments for a mortgage modification before you’ve signed paperwork with the lender. That means if someone asks for money before you’ve looped in your lender, they’re a crook. Also, real mortgage relief companies never guarantee loan modifications.
Making your mortgage relief choice
It’s scary to find yourself underwater on your home loan, but you do have options. Your choice will depend on your income, the size of your debt, and on whether you want to keep your home.
No matter what you choose, be sure to work with reputable companies and to understand the terms before you sign. For more insight on who you can trust, explore mortgage refinancing options with SuperMoney.