Are you one of the 3.2 million U.S. homeowners who owe more on their house than the property is worth? Being upside down on a mortgage is stressful, but not uncommon. If you purchased your home at the peak of the market or just before a bursting property bubble in your area, you could be among the many homeowners who need some form of mortgage relief.
Or maybe you’re one of the millions of Americans who finds themselves in either short or long-term financial crisis, making it difficult or impossible to continue with monthly mortgage payments. Fortunately, there may be some mortgage relief options for you as well.
What is mortgage relief?
Mortgage relief can refer to any program or assistance 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 unemployment or family medical issues.
Some mortgage relief programs will even wipe out a portion of your mortgage balance and overall debt.
Understand your mortgage terms
Before you look at any mortgage relief programs, you should have a thorough understanding of your current loan and its terms. If you are struggling to make your mortgage payments today, is there a chance that they will increase in the future?
- Fixed rate mortgages.
This mortgage will have the same annual percentage rate (APR) or 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 mortgages (ARMs).
These mortgages have adjustable interest rates for the life of the loan, so your payments will go up and down based on a market index.
- Hybrid mortgages.
These mortgages are fixed for a specific number of years and then become adjustable rate mortgages. For example, a 2/28 hybrid loan has a fixed rate for the first two years and then becomes and ARM for the remaining 28 years.
Maybe you have an ARM or a hybrid mortgage and are worried about payments increasing. Perhaps, you have one of these loans and payments have already increased, making it difficult or impossible to keep up.
If this is your situation, find out if you can refinance your mortgage to a fixed rate loan. This is worth considering if you plan to stay in the home long-term. Be sure to carefully read your contract. Look out for any prepayment penalties that might try to discourage refinancing early in the loan term.
Do you qualify for mortgage relief?
The type of mortgage relief you should pursue and even what you might qualify for depends on several factors. If you are a homeowner who is current on payments but underwater (you owe more than the home’s value), you might have a better chance of refinancing your mortgage.
On the other hand, if you have fallen behind on your mortgage payments, your situation is more serious. There are still several options that can provide mortgage relief, even when you are at risk of losing your home.
Depending on the program, there may be certain qualifications that you’ll need to meet.
For example, the home should be your primary residence, with the total of your first mortgage under a certain amount. Also, your total payments for your first mortgage, including principal, interest, insurance, taxes, and association fees is more than 31% of your gross household income. In some cases, a financial hardship such as an illness or job loss could impact your ability to make your mortgage payments.
When you are behind on your mortgage payments
If you’ve fallen behind on your monthly mortgage 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 monthly household income on rent or a mortgage payment.
That same survey revealed that 34% of Americans either know someone or have themselves been foreclosed upon or been evicted from their home in the past five years. If you’re a homeowner that is missing mortgage payments, the bank is going to notice, and the problem is not going to go away.
You’ll need to face the issue head-on with some form of mortgage relief plan, or you will soon have a foreclosure notice in the mail.
One of the first things that you should do is contact your mortgage lender or loan servicer. You should call them as soon as you can see that you will be in trouble with your mortgage. The longer you wait to address this, the fewer options you’ll have for mortgage relief.
The mortgage relief process
The mortgage relief process is often tedious and complicated. When you call your mortgage lender, you will probably be passed along to several people before you find someone who has the authority to speak to you about your loan. Bring your patience, a pen and paper, and some documentation to this phone encounter.
Whether you are dealing with your mortgage lender or another party that will help with mortgage relief, you should have some documentation on hand that includes:
- 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.
- Any additional documentation of financial
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.
Types of mortgage relief
Depending on your circumstances and your desire to stay in your home or move on, you have several options for mortgage relief. These include:
- Selling your home
- Chapter 13 bankruptcy
- Deed in lieu of foreclosure
- Short sale
- Mortgage foreclosure
- loan forbearance
- Loan modification
Sell your home
Let’s assume that you are current on your mortgage payments or only slightly behind. Depending on how underwater you are on your mortgage, you might consider trying to sell your home.
The housing market has recovered considerably over the last several years, and many areas are once again considered seller’s markets. In some cities, there are even bidding wars for homes, so you just might be able to sell your home, come close to paying off your mortgage, and move on to a fresh start.
Chapter 13 bankruptcy
When you are in danger of losing your home and are behind in paying off other debts, you might consider bankruptcy. While usually a last resort when you are in financial trouble, a bankruptcy 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 also have other debts that are weighing you down. A Chapter 13 bankruptcy could discharge a 2nd mortgage if you are underwater on your loans, and will help make your total payments more affordable. There are long-term negative credit rating implications tied to bankruptcy, however. If you’re considering bankruptcy, talk to a bankruptcy lawyer before making a decision.
Deed in lieu of foreclosure
A deed in lieu of foreclosure (DIL) is also known as a Mortgage Release. This option requires that you voluntarily sign over the title to the property to your lender. In return, the lender will give you a release from the mortgage obligation.
In some cases, the lender will give you a relocation incentive, allow you to remain in the home rent-free for several months, or will lease the home back to you at market rates for up to a year.
DIL is one choice if you are underwater on your loan, behind on your payments, and are ineligible to refinance. You should also be willing to leave the home and have some type of financial hardship.
Another choice if foreclosure is imminent is a short sale. In this case, you are giving up your home and achieving a 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. Potential buyers make offers on the home that the lender must approve. Once closed, the lender releases their lien on the property, and your obligations are finished.
While walking away from your home may seem like the simplest solution, it could have the most negative long-term consequences.
If you are underwater on your loan, the mortgage company can still pursue you for the “deficiency balance,” which is the difference between the loan balance and their sales proceeds. Also, a 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. If you are experiencing a short-term financial hardship that impacts your ability to pay your mortgage, you should ask your lender for a forbearance.
Terms and qualifications for a forbearance vary by lender. Depending on your circumstances, you might either 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 31% of your gross income, or $1,333.
In some cases, you can negotiate a loan modification directly with your mortgage lender. If you aren’t able to pay your mortgage, it often benefits the lender to negotiate terms with the homeowner that keep them in the home.
A lender might threaten foreclosure, and this is their right, but foreclosing on a home also costs the lender a lot of time and money. If negotiations aren’t going smoothly with the mortgage company, there may be other loan modification options available.
HAMP and HARP
The federal government put several home modification programs in place in the wake of the housing downturn. The popular Home Affordable Modification Program (HAMP), was extended several times but finally expired at the end of 2016. There are a few other choices still in place.
The Home Affordable Refinance Program (HARP) remains in effect through December 31, 2018. This program allows homeowners with either Fannie Mae or Freddie Mac loans to refinance and reduce their monthly payments.
No minimum credit score is required with HARP. This loan can transfer an ARM mortgage to a fixed rate mortgage. A HARP loan will also bundle closing costs into the new loan, so there are no upfront fees.
To be eligible for a HARP loan, you should be current on your mortgage payments. Your original loan date should be May 31, 2009, or before, and your loan-to-value ratio (LTV) must be greater than 80%.
Another government option is called the 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 for 18 states and the District of Columbia to help with such things as mortgage payment assistance, principal reduction, and even relocation assistance to more affordable areas. The program remains active through 2020.
When your mortgage is in default, and you wish to save your home from foreclosure, mortgage reinstatement is one of your options. This requires that you pay the amounts past due to bring your mortgage current.
In some cases, a lender will devise a repayment plan to reinstate your mortgage. Your past due amounts will be spread out over an agreed period, and are in addition to your regular mortgage payments.
Mortgage reinstatement is a good choice if your financial hardship was short-term, you don’t want to refinance your loan, and you are only slightly behind on your payments.
The tax implications of mortgage relief
It would be disappointing to get out of a debt situation with successful mortgage relief only to receive a surprise tax bill a few months later. Unfortunately, this is a common occurrence.
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 income that is subject to taxes.
Fortunately, the “Mortgage Debt Relief Act of 2007” gives troubled homeowners a break, at least for now. Under this Act, canceled mortgage debt up to $2 million on a primary residence is excluded from taxation as income.
Even if your mortgage relief is exempt from taxes, you are still required to file a Form 982 with your tax return.
Right now, that relief has been extended for all debt that receives a discharge through the end of 2016. If your mortgage relief takes place in 2017 or later, pay close attention to updates or extensions in the tax code.
Watch out for mortgage relief scams
After the 2008 housing crisis, there were more than 10 million families who were left underwater on their mortgages. Unfortunately, the scamming didn’t stop with the subprime loans.
Where there are people in financial straits, there will also be scammers waiting to take advantage and make a quick buck. There are some enticing mortgage relief pitches out there that seem like all your troubles will be a thing of the past with just a few signatures. Beware of these predatory mortgage relief scams:
The lease/buy back
Homeowners are convinced that they should sign over the deed to their home to a company who will allow them to continue living in the home as renters. The agreement states that you will be able to buy back the home at some point. Unfortunately, the terms are so rigid that most renters get evicted while the mortgage relief company winds up with your home equity.
Foreclosure prevention specialist
These “specialists” say that they are counselors whose goal is to help you stay in your home and 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 and usually just postpone the inevitable.
Bait and switch
A fraudster might 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 be receiving an eviction notice shortly.
There are certain red flags with mortgage relief that give you a clue that you’re dealing with a scammer. Federal law prohibits companies from accepting payments for a mortgage modification before you’ve signed paperwork with the actual mortgage lender. Also, mortgage relief companies can’t guarantee that a loan will be modified.
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.
Making your mortgage relief choice
If you’re having trouble making your mortgage payments or find that you’re underwater on your home loan, there are several options for mortgage relief. The choices you make will depend on your circumstances and whether you desire to remain in your home.
When you are dealing with your home, it’s always best to work with reputable companies and to fully understand terms before you sign. If you’re unsure about a company, check them out. SuperMoney provides free expert reviews and consumer comments to help you out.
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.