Bank foreclosing? Try one of these options |
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"If someone has experienced a hardship that has led to increasing expenses or decreasing income, which has led to an inability to make their mortgage payment, the door is open to exploring the options for modification," Sahnger says.
According to Sahnger, a good modification reduces the monthly payment by about 25 percent to 30 percent, with $500 per month left over for disposable income. The Obama plan calls for modifications that leave homeowners with a total monthly mortgage debt of 31 percent or less of the borrower's gross income.
Achieving that goal requires a lot of personal information, says Charles Hokanson, a lawyer in Long Beach, Calif., who likens the modification process to compiling financials for a full-document loan or a bankruptcy.
Who do you work with for a modification?
With any loan modification, one simple question emerges: How much does this cost?
The answer ranges from free to a few thousand dollars and depends on who you use.
Walker says homeowners should start with a counselor approved by the U.S. Department of Housing and Urban Development, or HUD. Ideally that counselor will also have been certified by NeighborWorks America, a national nonprofit based in Washington, D.C., that specializes in coordinating community-based revitalization efforts.
Another resource Walker recommends is Hope Now, based in Washington, D.C., which is an alliance between HUD-approved counseling agents, mortgage companies, investors and other mortgage-market participants that provides homeowners with free foreclosure prevention assistance.
But the nonprofit route has its pros and cons.
HUD-approved counselors will cut through a lot of red tape and provide an impartial assessment of the situation by acting as a moderator between the bank and the homeowner, Walker says.
But Hokanson says they can't solve every case. "They only work if a bank is willing to talk, which isn't always the case, and they aren't in a position to handle cases that fall outside of the typical modification," he says.
Only attorneys, for example, can determine if any terms in the original loan violated the Truth in Lending Act, Hokanson says.
"As the mortgage bubble grew, a lot of people were taken advantage of and cheated. And for those people, relief is going to come from a lawyer, if it's going to come at all," he says.
Homeowners should look for lawyers with a background in foreclosures, real estate and bankruptcy.
How does a modification work?
Unlike refinancing, a loan modification changes the terms of the original note. While it has always been possible to modify the loan, Sahnger and Walker agree that the housing crisis has prompted banks to deal more with distressed homeowners.
"First, homeowners have to understand that the mortgage company doesn't want (its) house back. Foreclosure ... is the most expensive solution for them," Walker says. "The second fact is that they will take back your house if they need to."
Then what's on the table? Just about everything, Sahnger says.
That can mean a reduction in the loan principal, but more often it's an interest rate reduction. In other cases, the lender may simply offer lower monthly payments by extending the life of the loan, he says.
For those who can't get a modification
Despite a growing number of options and increased flexibility by banks, the housing crisis likely will cost many people their homes. When that happens, homeowners have a tough choice to make, and many are choosing a delaying strategy.
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