Foreclosure ruins your credit and forces you to give up your home. If you're facing the possibility of foreclosure, a modification can offer a long-term solution. A mortgage modification permanently changes the terms of your loan agreement to make the payment more affordable. Because foreclosure is expensive, lenders are often willing to strike deals with homeowners who are eager to save their homes.
What to Do if You Are Stuck With a Mortgage?
If you're stuck with your mortgage and struggling to make ends meet, contact your lender immediately. While still current, you can try refinancing the loan to reduce your interest rate and lower your payments. Under the federal Making Home Affordable Program, homeowners can apply for the Home Affordable Refinance Program. To qualify for HARP, the current loan-to-value ratio must exceed 80 percent. You also need to have a good payment history. If you owe more than the home is worth, an FHA Short Refinance can help. If your current lender is willing to participate, they're required to lower your first mortgage to no more than 97.75 percent of your home's present value. If you're behind on your payments, you might qualify for the Home Affordable Modification Program. To qualify, you need to have bought the home on or before January 1, 2009 and suffered a financial hardship. A mortgage modification can lower your interest rate, stretch the length of the loan, and even reduce the principal.
When is a Negotiator Assigned for a Mortgage Mod?
The loan modification process varies among lenders. Some assign your file to a negotiator early in the process, while others assign a negotiator near the final stages. You're unlikely to get a decision until your loan is assigned to a negotiator, because the negotiator analyzes the file and reviews all documentation to find a solution that benefits you and the lender.
What if My Mortgage Lender Won't Give Me a Loan Modification?
Unfortunately, there are no laws requiring lender to offer loan modifications. As of June 1, 2012, the Obama Administration expanded HAMP eligibility to help more homeowners qualify. The modifications are no longer restricted to primary residences. If you rent the home, or plan to rent out the home, you can apply for a modification. Although the target debt-to-income ratio is less than 31 percent, you aren't automatically disqualified for carrying a higher debt load. Your documented income needs to cover the new mortgage payment. Lenders create their own guidelines for private modifications. If your lender doesn't approve your request, explore other options. The U.S. Department of Housing and Urban Development sponsors housing counseling agencies across the country that provide free services. The foreclosure prevention counselors can evaluate your mortgage and determine the best route. Possible options include a short sale, deed in lieu of foreclosure and bankruptcy.
Loan Modification Vs. Short Sale
The goal of a mortgage modification is to make your payments more affordable. If you can't make your payments with or without a modification, a short sale is a way out. A short sale doesn't let you keep the home, however; the lender agrees to accept less than the balance still owed on the loan. If you participate in a short sale, foreclosure won't appear on your credit report and the lender agrees not to file a deficiency judgment. As is the case with modifications, short sales aren't guaranteed. While waiting for approval for either option, your credit score suffers. When your financial situation improves, you can consider buying a home again.
Can You Deduct Settlement Charges From Refinancing a Home Mortgage?
Settlement costs, also known as closing costs, include appraisal fees and processing fees. You can't deduct these costs if you refinanced your mortgage. Points, on the other hand, are deductible. If you used funds from refinancing to pay for home improvements, you may deduct the points associated with the home improvements in the year paid if you meet the Internal Revenue Service's criteria for such deductions. Typically, you spread out points over the life of the loan. To calculate your annual deduction, divide the total points paid by the number of payments remaining on the loan. Note that to deduct mortgage points, you must itemize your deductions.
- MakingHomeAffordable.gov: Lower Interest Rates
- KnowYourOptions.com: Avoid Foreclosure Overview
- CNN Money: Obama Administration Expands Foreclosure Prevention Program
- Internal Revenue Service: Publication 963 (2011), Home Mortgage Interest Deduction
- MakingHomeAffordable.gov: FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)
- AOL Real Estate: Understanding Short Sales
- All Cities USA: Loan Modification FAQs
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.