Know Your Mortgage Options and Avoid Foreclosure

Many homeowners struggle with making mortgage payments after purchasing a home. Unemployment, extended illnesses, and other life situations may cause a person who has otherwise paid their mortgage note on time to fall behind in making payments. For those who are struggling, there are a number of options available to avoid foreclosure and to allow them to stay in their homes. Homeowners who fall behind in their mortgage payments should not delay in contacting their lender to find out what they can do. Doing nothing will force the lender to start the foreclosure process.

Writing a mortgage hardship letter

Contacting the mortgage company and informing them of financial hardships, will make the lender more willing to work with borrowers who have fallen behind in their mortgage payments. One way of accomplishing this is through writing a letter of hardship to the lender.  The homeowner should be specific in the reasons for falling behind on payments and offer to work with the lender to resolve the debt. The letter should include the dates payments were due and the amount of those payments. It is also helpful to send recent bank statements, tax returns, and any other documentation that makes the case for financial hardship. Any letter written to the lender should include current contact information along with a thank you for taking the time to consider a work-out solution.

Refinance options

One viable option for many homeowners who are having difficulty meeting high mortgage payments is to refinance the loan at a lower interest rate. Different refinance options are available depending on the lender.

  • Fixed-rate option: A fixed-rate refinance option will allow the payment to stay the same over the life of the loan. Typical fixed-rate refinance options are 15, 20, and 30-year fixed-rate interest plans. Financing for a longer term, will lower the dollar amount of the monthly payments. However, a shorter-term loan will provide a lower interest rate.
  • FHA short-refinance: The FHA short-refinance plan is an option for borrowers who owe more on their homes than they are worth. The plan will allow the home to be refinanced for an amount lower than its appraised value. Lenders sometimes charge off a portion of the loan principal, thereby reducing the monthly payment amounts for the homeowner. There is no charge for homeowners to use this option.
  • Home affordable refinance: For Freddie Mac or Fannie Mae borrowers, the Home Affordable Refinance Program allows for low-cost refinancing for homeowners whose homes have depreciated in value. The borrower must demonstrate an ability to pay the new monthly note to be eligible for this plan.
  • Veterans Administration refinance: For active duty military and veterans, a number of refinance options are available if the current mortgage notes are too high. A rate-reduction mortgage, or streamline refinance mortgage will refinance VA home mortgage loans for a lower interest rate. It is possible to get a streamline refinance mortgage option at no additional charge to the homeowner. There is also a cash-out refinance option where the loan is refinanced for more than the original amount. This allows the homeowner to receive cash back which can be used for many purposes, including catching up on delinquent bills.

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Other mortgage options for delinquencies

After the lender is contacted about a home owner’s inability to bring his account current, there are a number of work-out options the lender has available including forbearance, reinstatement, or repayment plans. With forbearance, the lender can temporarily suspend or reduce the mortgage note amount to allow homeowners to get back on their feet. Reinstatement is an option available for homeowners who can demonstrate to the mortgage lender they will be able to bring their account current at a future date. This option may be combined with forbearance. After a period of forbearance, the delinquencies are paid and the borrower assumes their normal payment schedule. A repayment plan can be offered if the delinquency is due to a short-term financial setback. With this option, the missed payments are made up by paying a portion of the delinquency with each monthly payment until the mortgage note is brought current.

Mortgage modification option

The mortgage modification option is an option for borrowers who are not able to bring their accounts current. The mortgage modification agreement permanently changes the terms of the loan. The lender may be willing to offer a new loan with lower interest rates and a longer time to repay the loan. This will help the homeowner in being able to stay current with mortgage payments and avoid becoming delinquent with future payments.

Qualifications for a mortgage modification

The lender will assess the borrower’s current financial situation to see if mortgage modification is an option. Some of the criteria for qualifying for a mortgage modification are:

  • Demonstrated hardship: Hardship has to be demonstrated along with the home owner’s inability to pay the current monthly notes. Extended periods of unemployment or illness are examples of reasons the lender may qualify as acceptable evidence of hardship.
  • Delinquency: The payments must be a minimum of 60 days delinquent to qualify for a mortgage modification.
  • Property qualifications: To be eligible for a mortgage modification, the loan must not have been for a second home or to purchase investment property.
  • Other criteria: Homeowners who are currently in foreclosure proceedings are ineligible for a mortgage modification loan. Furthermore, the borrower must not be in any type of bankruptcy or discharged from a Chapter 7 bankruptcy after taking out the original mortgage loan.

There is help available for those for fall behind in their mortgage payments. It is, however, imperative that borrowers contact the lender as soon as possible upon learning that they will be unable to make the payment on time. Lenders have several options available and are often willing to work with their customers who contact them for help in finding mortgage payment solutions.

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