How to Save Your Home and Avoid Foreclosure
Have you fallen behind on your mortgage payments? Or do you think you might be about to fall behind on your mortgage payments? If so, you could be in a sticky situation.
You want to save your home and avoid defaulting on your mortgage, but you’re not sure what to do. One possible solution may be a loan modification program. A mortgage loan modification is when a lender changes the terms of the loan. This can make it easier to make your mortgage payments.
How Does a Home Loan Modification Work?
Basically, loan modifications are typically reserved for those with financial hardship. Modifying a home loan is best when your credit score has fallen low enough that you aren’t able to refinance. Loan modifications change the terms of your home loan with your lender. Modifying the term of the loan can help you get back on your feet. With new loan terms, you can continue paying off the mortgage and save your home. In other words, if you don’t qualify for refinancing, you might want to consider a mortgage loan modification.
Loan Modification Programs
A home loan modification can be a long and frustrating process. After all, it’s a permanent restructuring of the mortgage. One or more of the terms of your home loan are changed to provide a more affordable payment. With a loan modification, the lender may agree to do one or more of the following to reduce your monthly payment:
Reduce the interest rate for the term of the loan
Extend the length of the term of the loan
Apply an amount in arrears to the end of the loan
Generally, to be eligible for loan modifications and avoid foreclosure, you must:
Demonstrate you are unable to make your current mortgage payment as a result of a financial hardship
Complete a trial period to demonstrate you can afford the new monthly payment
Provide all required documentation to the lender for evaluation
Required documentation will likely include:
Proof of income
Your most recent tax returns
Financial hardship statement, which explains in your own words why you can’t make your mortgage payment
Loan Modification Programs Can Make It Easier to Pay Your Mortgage
In order to help you make your monthly payments and avoid a potential foreclosure, a loan modification may be able to:
Reduce your interest rate
Lower your monthly payment
Extend the term of your loan
There’s a downside of loan modification, though. Your loan is modified to pay smaller monthly payments over a longer term. However, you are likely to pay more money in interest overall during the life of your loan.
Other Methods to Help Avoid Foreclosure
Let’s say you’re unable to negotiate with your lender to get a mortgage loan modification. Let’s also assume your lender intends to foreclose on your home in order to recoup their investment. There may be one final way to save your home: a Chapter 13 bankruptcy. If you qualify for this kind of bankruptcy, your lender will be forced to immediately stop all foreclosure proceedings. The lender will typically have to give you some time in order to correct your mortgage default.
The exact proceedings can differ from state to state. In some states, a lender has to file a lawsuit in order to foreclose on your home. Under Chapter 13, homeowners may have as much as five years to make up their missed mortgage payments. Usually, homeowners will make their payments to a third-party bankruptcy trustee, who will then, in turn, pay the lender.
Beware of Loan Modification Scams
When you want to save your home, you might feel desperate for a quick solution. It’s important to be sure you don’t act out of fear or desperation. Take some time to research any company you consider for loan modifications beforehand.
Here’s why: loan modifications are a magnet for and rip-off artists. Con artists know that consumers tend to ask for loan modifications when they are struggling. Of course, it doesn’t help that the moment your home goes into foreclosure, it becomes a matter of public record. This works like advertising to shady third-party companies and criminals: “Hey, here’s another vulnerable victim!”
In other words, it’s important to remember that there are a lot of unethical companies and individuals out there. These scammers claim that they can negotiate directly with your lender in order to modify your loan. Most of the time, these are not legitimate—and a few of the major warning signs include:
Requesting an upfront fee for loan modification
Telling you to sign paperwork without reading it
Asking you to send payments to a party other than your lender or servicer
Some scammers may even tell you sign over the title to your home! This could end up being a financial disaster. That’s why it’s always important to do your research first. Never pay money to anyone without taking the proper precautions.
What was the Home Affordable Modification Program (HAMP)?
The Home Affordable Modification Program, or HAMP, was a program created by the U.S. federal government. HAMP was designed to help homeowners avoid foreclosure by reducing their monthly mortgage payments. The program began in 2009 and expired on December 31st, 2016. HAMP was specifically implemented after the 2008 subprime mortgage crisis in order to help struggling homeowners keep their homes.
The U.S. Department of the Treasury provided a series of guidelines and incentives. The program allowed lenders and investors to modify borrowers’ loans. HAMP made it possible for people to keep their homes. Fortunately, though the program no longer exists, many lenders have created their own loan modifications loosely-based upon HAMP guidelines.
How did the HAMP Program Work?
The HAMP program didn’t offer loans, refinancing, or mortgage insurance. It was a series of financial guidelines and incentives for mortgage servicers and investors to offer modified loans to borrowers. Some of these modifications included:
Increasing the term of a loan
Reducing the interest rate
Reducing the principal
Allowing forbearance (the ability to temporarily postpone payments)
Who Qualified for the HAMP Program?
The HAMP Program was only available to homeowners in specific situations. This included those who:
Could demonstrate and document a tough financial situation
Could show that they were able to make modified, reduced mortgage payments
On average, HAMP was able to reduce monthly mortgage payments by an average of $530 per borrower. The program helped families struggling to pay their bills to stay current on their home loans. HAMP and other programs led to more than five million mortgages modified to help borrowers avoid foreclosure.
What Can Struggling Homeowners Do Now?
While HAMP is no longer operational, there are still many homeowners who may be struggling and might need a loan modification. For some of them, the government’s Home Affordable Refinance Program (HARP) will do the trick.
This program is somewhat limited in scope, however, its purpose remains positive for borrowers. It only permits Freddie Mac and Fannie Mae-insured loans to be modified. If your loan isn’t insured by Freddie Mac or Fannie Mae, check with your lender. Many lenders have proprietary loan modification programs that can be used to prevent default and/or foreclosure.
However, if all else fails, you may have some options even if you do go into foreclosure.
We’ve discussed loan modification agreement—a permanent solution to unaffordable monthly payments. For short-term relief of mortgage payments, a forbearance agreement may help. A forbearance agreement is not like a repayment plan. Instead, the lender agrees in advance for you to miss or reduce your payments for a set period of time.
A forbearance agreement is when the lender agrees to reduce or suspend mortgage payments for a certain period of time. The lender also agrees not to initiate a foreclosure during the forbearance period. In exchange, the borrower must:
Resume the full payment at the end of the forbearance period
Pay an additional amount to get current on the missed payments, including principal, interest, taxes, and insurance. (The specific terms of a forbearance agreement will vary from lender to lender.)
Do you have a temporary hardship causing you to fall behind in your mortgage payments? A forbearance agreement may allow you to avoid foreclosure until your situation gets better. If your hardship is unresolved at the end of the forbearance period, you may be able to get an extension.
Judicial Foreclosure and Power of Sale By State
Some states allow lenders to sell a home without going through the court system. They are able to use a provision in a mortgage called “power of sale.” Those states that don’t allow power of sale force lenders to attempt a judicial foreclosure. Power of sale allows the lender to repossess and eventually sell the property.
States That Only Allow Judicial Foreclosure
Currently, 22 states in the U.S. only allow banks to attempt judicial foreclosures, including:
States That Allow Power of Sale
As of now, 28 states and the District of Columbia allow power of sale. They are:
How Power of Sale Works
Every state that allows it has slightly different rules when it comes to power of sale. However, a few things are usually necessary for it to occur, including:
The borrower has defaulted by failing to make payments
The lender must provide limited notice of the foreclosure
After a specific period of time, a third party trustee can sell the home at a foreclosure sale
Power of Sale Has Some Benefits for Foreclosed Homeowners
Power of sale is typically a bad thing for homeowners. It limits the amount of time they have before a foreclosure sale occurs. However, it can still have a few upsides. For example, some states prohibit lenders from seeking out a deficiency judgment if power of sale foreclosure is used. When the proceeds from a foreclosure sale don’t cover the outstanding amount of the loan, the remainder is called the “deficiency.”
Deficiency judgments are personal legal judgments. They are allowed in some states that allow a lender to go after a borrower for the amount of that deficiency. In addition, in states with power of sale, borrowers can still seek judicial review of the foreclosure. But when they do, it will require the borrower to file a lawsuit against the lender.
Statutory Redemption Laws Exist in Some States
Has your home been sold in a foreclosure sale? Whether via power of sale or judicial foreclosure, you may qualify for something called statutory redemption. About half of states allow for statutory redemption, which is a period of time when a borrower can reclaim their home.
This works only if the borrower can pay the full price of the home as it was sold in the foreclosure sale. This time period usually varies from six months to one year. Typically, the homeowner can remain on the property during this period.