If you are having trouble paying your mortgage and are in danger of losing your home, you may be wondering how things got so bad and how you can keep your home. You may have heard stories about lost paperwork and denied loan modifications. While it's true there have been difficulties, lenders do want to help you.
The Troubled Mortgage Problem
The steep economic downturn left both borrowers and lenders alike unprepared for the fallout. When the housing market collapsed, people were unable to sell the homes they could no longer afford to keep. Many people also found they owed more than their homes were worth.
Borrowers wanted and needed lower payments. Banks said they couldn't help because they no longer owned the mortgage notes. Standard practice is to bundle and sell them as mortgage-backed securities. Once this happens, your only option is refinancing. Unfortunately, under normal circumstances banks won't lend you more money than your house is worth, and if you’re having financial difficulties, you'll have trouble getting any loan.
Possible Troubled Mortgage Solutions
In 2009, the federal government set up programs to help homeowners with troubled mortgages. These programs apply only to first mortgages on your primary residence, not second mortgages, investment property or vacation homes.
The Home Affordable Refinancing Program (HARP): Under HARP, you may be able to refinance into a lower interest rate loan. Acceptance is not guaranteed, but you may be eligible if you:
- Have a loan owned or backed by Fannie Mae or Freddie Mac
- Owe no more than 125% of your home's current market value
- Are current on your mortgage payments
- Can show an ability to afford the new payments
If you have a second mortgage, that lender must agree that its lien remains a junior lien.
The Home Affordable Modification Program (HAMP): This program may be available to you even if you are already behind on payments or your loan is not backed by Fannie Mae or Freddie Mac.
You may qualify if:
- You cannot afford your mortgage payments due to verifiable financial hardship
- Your mortgage payment is more than 31% of your pre-tax income
- You received your loan on or before January 1, 2009
- You owe less than $729,750 on a single-family home (higher limits apply for owner-occupied buildings up to four units)
Initially, this program allowed you to receive approval by phone and supply necessary documentation later. Unfortunately, this led to later denial of permanent modifications, because applicants did not actually qualify. New rules to take effect June 1, 2010 require you to submit all paperwork before approval. Once approved, your modification will become permanent as long as you make all trial payments on time.
HAMP may soon also allow second mortgage modifications. Bank of America recently became the first lender to agree to modify second mortgages.
Gather Financial Records
Before your lender will approve a loan modification, you will need to prove you really need a modification and that you will be able to afford your new payments.
Required documentation may include:
- Proof of income: pay stubs or unemployment check stubs
- Proof of expenses: cancelled checks, bank statements, copies of bills
- A list of current assets: all bank accounts, investments, other property
- A list of all current debts: include totals owed and monthly payments
- Tax returns for the past two years
- An estimate of the current market value of your home
To avoid unnecessary stress, contact your lender to ask about modification as soon as you know you are in trouble.