- What if I can no longer afford my mortgage payments?
- Will this have an adverse effect on my credit?
- What are the consequences of a foreclosure?
- What is mortgage forbearance?
- What is refinancing?
- What is a loan modification?
- What is short refinancing?
- What is a short sale?
- What are the implications of a short sale on my credit?
- What are the implications of a short sale with respect to my taxes?
- What is a credit score?
- What is the difference between loan modification and refinancing?
- Do I have to have good credit for a loan modification?
- What are debt-to-income guidelines?
- Why do lenders want to modify loans?
- Do I have to be behind on my payments in order to qualify for a loan modification?
- Several companies have contacted me recently offering to help. What do I need to know?
- Should I negotiate with the lender myself?
- What are the criteria that are used to see if I qualify for a loan modification?
- What types of loan modifications are available?
- Can I get the servicer or lender to reduce the principal balance on my loan?
- What documentation is required for a loan modification to be effective?
- What do I need to do to be prepared to discuss obtaining a loan modification from my servicer?
- How soon after I am approved will my loan modification be in place?
- How does a loan modification impact my credit score?
- What is the LTV Ratio?
- What are stipulations and why won’t the servicer modify my loan right away?
- Will my loan modification cost me anything?
- Should I refinance my loan or try to get a loan modification?
- How does my credit score affect my ability to get a loan modification?
- What is needed to get a new loan?
- What are a mortgage broker, lender, and servicer?
- What role does a servicer play with my loan?
- What are prime loans?
- What are sub-prime loans?
- What are Alt A loans?
- What is a conforming loan?
- What do I do if my loan amount is greater than the conforming loan limit?
- What are Fannie Mae and Freddie Mac?
- How does my credit score impact my ability to refinance?
- What is the foreclosure process or foreclosure timeline?
- How can you stop a foreclosure?
What if I can no longer afford my mortgage payments?
If you are having trouble making payments, your first step is to call your servicer and get on record as being ready and willing to take steps to keep your home. If your situation is truly dire you might have to consider a short sale. You want to avoid foreclosure if at all possible. Today there is an unprecedented number of options available to you to lower your mortgage payments, both through the private sector and backed by the government. These include refinance, loan modification, temporary forbearance and short refinancing.
Will this have an adverse effect on my credit?
Depending on the solution you work out, your credit score can actually improve. Being late with your payments will definitely lower your credit score. Missing payments will ultimately result in a foreclosure.
What are the consequences of a foreclosure?
In a foreclosure the lender seizes your property as collateral for its home loan. You’ll lose not only your home but all the equity you’ve invested in it. The foreclosure becomes a matter of public record and stays on your credit report for seven years. In some states, you can be liable for any loss the lender experiences in selling your house. It will take at least two to three years, possibly quite a bit longer, before you find any lender with a reasonable enough interest rate for you to consider buying another home.
What is mortgage forbearance?
Forbearance is when a lender agrees to allow you to delay payments for a short period of time in a period of temporary hardship such as a job loss. No portion of the original agreement is changed. The money owed keeps accumulating. It is at best a short term solution.
Refinancing is replacing your existing first mortgage with a new one, sort of like trading one mortgage for another. There is no better time for refinancing because interest rates on 30-year fixed mortgages are at close to a record low, under 5 percent. If you qualify for the lowest rate and were to refinance a $250,000 30-year fixed mortgage originally written at 7.5 percent you’d save more than $400 a month. That’s the equivalent of a raise of almost $5,000 a year.
What is a loan modification?
A loan modification is rewriting the terms of your existing mortgage to make it easier for a troubled borrower to cover his or her monthly mortgage payments. Most of the time, the mortgage payment cut comes in the interest rate charged. To qualify for a loan modification borrowers generally must face a substantial change in income due to previous unemployment, wage reduction or a decline in self-employment income; changes in household financial circumstances such as birth of a child, separation or divorce or a major unexpected expenditure; a steep increase in household expenses such as a change to monthly mortgage payment due an adjustable loan, higher utility bills or property taxes; or a significant drop in cash reserves and liquid assets or precarious overextension of credit.
Loan modifications require proof of financial hardship and documentation in the form of pays stubs, tax returns or receipts for monthly expenses to support that you can cover the reduced payments.
Short refinancing is when your current lender agrees to reduce the amount of the principal owed on your home so that you can refinance with another lender. Lenders are generally more amenable to a loan modification than resorting to this option. In fact, most people who qualify for short refinance are already in foreclosure. With this option the homeowner gets to stay. The lender accepts a lower payoff in return for not going through the hassle and expense of foreclosing on a property.
In a short sale the lender accepts less than is owed on the mortgage as payment in full for its interest in the home. This choice is just short of a foreclosure and is only allowed by a lender if it calculates that it will lose less from a short sale than it would from a foreclosure. In short sales homeowners lose their homes.
What are the implications of a short sale on my credit?
You can expect to take hit of 200 to 300 points on your credit score.
What are the implications of a short sale with respect to my taxes?
Since a short sale is a cancellation of indebtedness by a lender, it is considered earned income and you will be taxed on it.
What is a credit score?
A credit score is a measure of your credit worthiness. It is a three digit number ranging from 300 to 850. Most fall in the 600 to 700 range. Your credit rating is based on several factors, including your bill paying history and debt-to-income ratio. Credit scores are sometimes known as FICO scores, which is an acronym for the Fair Isaac Corporation and is the originator of this numerical system.
What is the difference between loan modification and refinancing?
Both could reduce your mortgage payments. To get a refinance, you have to go through the same steps you did to obtain your first mortgage, including shopping for a lender, getting your home appraised, going through a credit check and paying a percentage of the principal as points to originate it. In a non-conforming loan, most lenders won’t accept a refinance if your loan to value is greater than 80 percent such as owing $850,000 on a $1 million co-op in New York City. However, you do have the maximum flexibility to shop for the best rate available.
Loan modifications go through your lender’s loss mitigation department. You must supply proof of income, outline your expenses and write a hardship letter. A lender will not modify a mortgage unless you can show that a change in its terms will enable you to repay it in a timely manner. If you have a second mortgage, it has to be modified separately.
Do I have to have good credit for a loan modification?
Eligibility for loan modifications is not based on your credit score. Loan modifications are approved based on a borrower’s ability to make monthly payments such as an acceptable debt to income ratio and the documentation of his or her hardship. If your hardship consists of being recently laid off, you won’t qualify for a loan modification until you reestablish some revenue.
Some loan modifications have a trial period, allowing a lender to see if you are committed to staying current with your mortgage; if you fall behind, your credit score will suffer.
What are debt-to-income (DTI) guidelines?
The Federal Housing Administration (FHA), which guarantees loans for first-time home buyers or those with lower credit scores, as well as many lenders use debt-to-income (DTI) guidelines to determine whether or not a borrower can afford a mortgage. To calculate the DTI ratio, take the total amount of your monthly ongoing and long-term debt and divide it by your monthly income. For example, an applicant with $3,000 in income and $700 in debt would have a DTI ratio of 23 percent.
When calculating your DTI ratio include car loans, credit card payments and court-ordered child support. Expenses such as child care, utility bills, short-term debt to be paid down within 10 months, rent and current mortgage payments are not considered. In general, the FHA and banks prefer a DTI level or housing expense-to-income ratio of 43 percent or below. The lower the ratio, the better. When it comes to the first mortgage (including principal, interest taxes, insurance and homeowner’s association dues, if applicable) it should be 31 percent or less.
Lenders are more lenient about allowing higher DTI ratios in certain situations: if an applicant puts down more than the required three percent by FHA or if the home being purchased qualifies as an energy efficient home. Moreover, if the applicant has a lot of assets or otherwise has the ability to pay for the home even if his or her income drops, FHA lenders could be lenient on DTI ratios.
Why do lenders want to modify loans?
Lenders recognize that borrowers are having trouble in today’s economy, but loan modifications benefit lenders as well.
Foreclosures are expensive for lenders. With a foreclosed property, lenders are no longer collecting mortgage payments. Lenders also have the added expense of upkeep on the foreclosed property to make sure it doesn’t fall into disrepair on top of the costs associated with marketing and selling the property. Often times it’s in a lender’s best financial interest to find a way to keep you in your home even if the monthly payments received are lower than the amount you were previously paying.
Lastly, mortgages are considered assets by lenders. When you fall behind on making your loan payments, your mortgage is worth less as an asset. The lender may then be required to write down the value of your loan. If the lender’s assets fall dramatically in value, this could mean trouble for the lender.
The bottom line is that there are a number of very good and logical reasons for a lender to work with you if do have a real hardship. That can be good news all around. When loan modifications are done properly, both the borrower and the lender win.
Do I have to be behind on my payments in order to qualify for a loan modification?
No. It’s very important to stay current on your payments if at all possible. Not all loan modifications are approved, and if this is the case, you’ll want good credit to take best advantage of any other possible solutions.
Hardship is the determining factor for a loan modification, not delinquency. In fact, many lenders and government programs launched as part of President Obama’s Homeowners Affordability and Stability Plan allow borrowers to qualify for loan modifications even if they are current. These borrowers may be facing financial hardship. They may have just been laid off or the value of their property may have dropped substantially.
Before making the rash decision to skip a mortgage payment, see if there are loan modification programs for which you may qualify. Additionally, if you remain current on your mortgage payments and protect your credit, there are a number of mortgage refinancing programs available, including some that allow you to borrow more than the current value of your home. However, if you have already fallen behind, many lenders’ loss mitigation departments will fold your overdue payments into your mortgage, extending its length.
Several companies have contacted me recently offering to help. What do I need to know?
Choose a reputable company to handle your loan modification. Make sure that the firm is experienced, and has identifiable principle owners. Ideally it should be a member of the Better Business Bureau. Ask if it is registered with the state department of real estate to accept funds in advance. How much does the company charge for a loan modification? Is there any kind of money back guarantee?
ForeclosureIQ.com does not endorse any firm or individual who charges an upfront fee, unless these fees are nominal processing fees of $100 or less. Servicers charge administrative fees, typically ranging between $300 to $600, only upon the successful completion of a loan modification. Fees are paid at closing and are often added into the principal balance of the newly modified loan. Many companies, individuals and even law firms are charging $1,000 or more in upfront fees. If you encounter one of these companies, steer clear.
Should I negotiate with the lender myself?
Yes. We suggest that you try to gain control over your situation yourself before asking for third party help.
What are the criteria that are used to see if I qualify for a loan modification?
To qualify for a loan modification you will need documented income, hardship and an imbalance between income and expenses that can be remedied by a reduction in your payment.
What types of loan modifications are available?
Most commonly, lenders will reduce the interest rate on the loan. This can either be a permanent long-term reduction in interest, changing an Adjustable Rate Mortgage (ARM) to a 30-year fixed, or it can be a temporary reduction with the interest increasing to a still-reasonable over time.
Can I get the servicer or lender to reduce the principal balance on my loan?
It’s unlikely that your servicer or lender will reduce your principal balance. On their own, most lenders won’t write down the principal owed, as that would mean that they would carry your home on their books for its full value. In some cases, however, lenders will reduce the principal, which occurs more frequently because under the Obama’s Homeowner Affordability and Stability Plan, a lender can reduce principal of a loan with the U.S. Treasury sharing in the cost.
What documentation is required for a loan modification to be effective?
You will need to document income expenses and hardship with as much supporting evidence as possible to get an effective loan modification. These documents include the following:
- W-2s from the past two years.
- Pay stubs
- If you’re self employed, two years of tax returns – all pages
- Two months of your most recent bank statements – all pages
- Copy of your mortgage note
- Copy of your mortgage statement or coupon
- Copy of homeowners insurance policy
- Copy of mortgage insurance
- Copies of all legal notices received from your lender
- Copies of all bills including utilities, auto loans, insurance, student loans and credit card bills showing account balances and monthly payments
- Documentation for any second mortgage on the property
- Hardship letter given the reasons for needing a loan modification such as adjustable rate mortgage reset, loss of job (although you must have current income for a loan modification), reduced income, excessive financial responsibility, death of spouse or co-borrower, incarceration, divorce or separation, military duty or natural disaster
- Cover sheet outlining total monthly income from all sources and total liabilities
What do I need to do to be prepared to discuss obtaining a loan modification from my servicer?
Prepare all your documents so that they are organized before discussing a loan modification with your servicer. Then, be ready to make a lot of calls and take extensive notes outlined with whom you talked and when. Deliver all requested material via U.S. Mail with return receipt requested to ensure delivery.
How does a loan modification impact my credit score?
Loan modifications are not flagged as derogatory information on your credit report. Once your loan has been formally modified, your credit score will not be penalized as long as you make timely payments, even if they are substantially lower than your original payments.
What is the LTV Ratio?
The loan-to-value (LTV) ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. Loan to value is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage. The risk of default is at the forefront of lending decisions, and the likelihood of a lender absorbing a loss in the foreclosure process increases as the amount of equity decreases. Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much stricter. Lenders can require borrowers of high LTV loans to buy mortgage insurance to protect the lender from the buyer default, which increases the costs of the borrowing.
What are stipulations and why won’t the servicer modify my loan right away?
A stipulation is an assumption made and agreed to by both parties as to what the facts are in a legal proceeding. Today, loan modification requests are simply overwhelming servicers. They are usually processed as they come in. Given today’s economy, however, they can readily take two or more months to process.
Will my loan modification cost me anything?
If you approach your lender directly a loan modification won’t cost you anything, but you might not get the best interest rate break because you have no record of the lenders track record with previous loan modifications. Non-profit organizations like NACA (the Neighborhood Assistance Corporation of America) might charge a modest fee.
ForeclosureIQ.com does not endorse any individuals or firms that charge an upfront fee, unless the charge is a nominal processing fees of $100 or less. Servicers charge administrative fees, typically ranging between $300 to $600, only upon the successful completion of a loan modification. Fees are paid at closing and are often added into the principal balance of the newly modified loan. Many companies, individuals and even law firms are charging $1,000 or more in upfront fees. If you encounter one of these companies, steer clear.
Should I refinance my loan or try to get a loan modification?
A refinance is always the optimal solution, if you can qualify. Today, interest rates have dropped dramatically. Moreover, as part of President Obama’s Home Affordable Refinance Program, borrowers can refinance up to 105 percent of the LTV. By refinancing borrowers can lock themselves into historically low 30-year fixed rates, reduce their monthly mortgage payments, eliminate risky adjustable-rate debt and/or consolidate first and second mortgages.
With a loan modification you are likely to see some temporary benefit but, in the end, you will likely suffer a higher interest rate over the life of your loan. Additionally, the timelines for approval of loan modifications can be stretch into several months given the high number of requests that most mortgage servicers are now handling.
How does my credit score affect my ability to get a loan modification?
Credit score doesn’t affect your ability to get a loan modification. Because loan modifications simply adjust the mortgage terms with your original lender, your credit score will not be taken into account to determine qualification. In many loan modification cases the borrower has however had some late or missed payments and his or her credit score has probably deteriorated somewhat.
What is needed to get a new loan?
As a rule of thumb, refinance transactions will require an appraisal, documented income, funds to cover closing costs, points and private mortgage insurance if your equity is less than 20 percent of your mortgage.
What are a mortgage broker, lender and servicer?
A mortgage broker is a middle man who sells mortgages on behalf of lenders. Lenders fund mortgages, which are then usually packaged and sold to investors.
Mortgage servicers are the companies that manage or service your loan. They collect and process payments, among other activities. After a mortgage is originated by a mortgage bank or mortgage broker, the loans need to be managed or serviced on an ongoing basis. This responsibility falls on the shoulders of a mortgage servicer, which operates independently from the entity that originated your loan. Some lenders have servicing divisions. Servicers are usually the first party with whom you will discuss your loan and any problems that you may have in making your mortgage payments.
What role does a servicer play with my loan?
The mortgage servicer is responsible for collecting and processing your monthly loan payments. A servicer also handles your escrow account, if you have one. All mortgage servicers have a responsibility to respond to your inquiries about your loan.
Mortgage servicers are responsible to the lenders and investors in mortgage securities to deal with late mortgage payments and seek to find a way to bring delinquent loans back to a current status. All servicers have a loss mitigation department to work with challenged borrowers. They will also have a collections department. This will be the department that will send out late notices on missed payments and contact you when you initially fall behind on your payments.
The following is a list of the 10 largest servicers in the United States. Collectively, these 10 companies service over 68 percent of all residential mortgages in the U.S. as of December 31, 2008, according to Mortgage Servicing News.
- Bank of America (purchased Countrywide) – 14.1 million loans
- Wells Fargo & Co (purchased Wachovia) – 12.4 million loans
- Chase (purchased Washington Mutual) – 10.5 million loans
- CitiMortgage, Inc. – 5.7 million loans
- Residential Capital LLC, GMAC – 2.7 million loans
- National City Mortgage – 1.2 million loans
- U.S. Bank Home Mortgage – 1.1 million loans
- SunTrust Mortgage – 945,000 loans
- Branch Banking & Trust Co. (BBT) – 831,000 loans
- IndyMac Bancorp, Inc. – 756,000 loans
Each of these companies works with thousands of borrowers every week. They have a number of resources in place to help borrowers who may be facing current problems or fear that they will soon struggle to stay current with their home mortgages.
What are prime loans?
Prime loans are granted to the least risky borrowers; these are people with high credit scores and clean credit ratings.
What are sub-prime loans?
Sub-prime loans are granted to risky borrowers; these are people with poor credit scores, income and assets that cannot be easily documented and high debt-to-income ratios. Traditionally, sub-prime loans carry the highest interest rates.
What are Alt A loans?
Mortgages that fall between prime and subprime loans are known as Alt A loans. The Alt A borrower might, for example, have too much debt but a decent income. Or, he or she may have a good credit rating but wish to purchase a house that is appraised for less than he or she is paying.
What is a conforming loan?
A conforming loan is a mortgage at or below the maximum dollar amount that is eligible to be purchased or securitized by Fannie Mae or Freddie Mac. These government-supported agencies either buy conforming mortgages or mortgage securities directly from approved mortgage sellers or provide a guarantee of timely payment of principal and interest on the loan. With their involvement, mortgage interest rates of conventional mortgages are driven down below the rates of non-conventional mortgages, e.g. sub-prime or jumbo mortgages.
The Housing and Economic Recovery Act of 2008 created two sets of new conforming loan limits: general conforming loan limits and high-cost area conforming loan limits. These limits apply to all conventional mortgages originated after January 1, 2009. The high-cost area’s maximum loan amounts are determined by the Federal Housing Finance Agency (http://www.fhfa.gov/).
In most markets, a conforming loan is under $417,000. For high cost areas, the maximum conforming loan amount on a single family residence is $625,500.
Maximum Original Principal Balance
Contiguous States, Washington, DC and Puerto Rico
Alaska, Guam, Hawaii and the U.S. Virgin Islands
To see whether your property is in a high cost area, go to: http://www.fhfa.gov/.
What do I do if my loan amount is greater than the conforming loan limit?
If your loan amount exceeds the conforming loan limit in your area, you will need a non-conforming (or jumbo) loan. There are still jumbo loan programs available to borrowers with good credit who require higher loan amounts. However, the loan underwriting standards for non-conforming loans have become considerably more stringent. You will have to document your income and provide proof of assets that show your ability to handle your mortgage payment and initial loan fees. Interest rates will likely be higher than for a conforming loan. Because of this, some borrowers perched just above the conforming limit offer a larger down payment in order to fall within conforming loan parameters.
What are Fannie Mae and Freddie Mac?
The Federal National Mortgage Association, Fannie Mae and the Federal Home Mortgage Corporation, Freddie Mac, are government-sponsored enterprises that purchase and secure mortgages to make sure that funds are available to U.S. homebuyers. Although privately owned they are government-backed.
How does my credit score impact my ability to refinance?
Your credit score is one of the most important determinants of whether you will be approved and for what type of loan programs you qualify. It will significantly impact the loan’s interest rate. Ideally, you want a credit score of at least 720 to 740. A higher credit score will help you qualify for better loan programs and lower interest rates. A credit score below 600 may push you into a sub-prime loan that could carry much higher fees and percentage.
To illustrate how keenly your interest rate can impact your monthly mortgage and your total interest expense, consider this real life example: Couple #1 qualifies for a 5 percent, 30-year fixed mortgage on a $200,000 loan. Their monthly payment is $1,073 and their total interest over the 30-year period is $176,579.
Couple #2 has a lower credit score. They are only able to qualify for an 8 percent interest rate on a 30-year fixed, $200,000 mortgage. Their monthly payment is $1,398 and their lifetime interest is $288,497.
This difference costs Couple #2 $325 per month (30 percent higher monthly payment) and a total of $111,919 in additional interest over the life of the loan.
Do everything you can to protect your credit score.
What is the foreclosure process or foreclosure timeline?
These steps vary state to state but in general, the foreclosure process begins when a borrower is late with his or her mortgage payment, yet remains on the premises.
- Notice of Default is the first step. It’s a written notice that can be delivered between a week to months after a payment is missed. The notice states that the borrower is late, how much money is owed and how late the payment is. It will outline what a borrower needs to do to catch up and prevent foreclosure.
- In a non-judicial foreclosure in California, the next step occurs 90 days after the Notice of Default. The trustee publishes a notice of trustee sale in a local paper and files that notice with the County Clerk’s Office.
- Twenty days later, the lender takes ownership of the house and may sell it at public auction.
For a look at foreclosure laws state by state go to http://www.foreclosurelaw.org/.
How can you stop a foreclosure?
A refinance or forbearance can stop the foreclosure while the borrower’s credit is still good. A loan modification can stop a foreclosure as well, and can often occur through the notice of default. When the notice of sale is filed, it is still often possible to stay in the property with a short refinance. Short sales are another way to stop a foreclosure.
It’s also possible to stop the foreclosure by paying off the mortgage in full at any time before the auction. Many states offer a redemption period which occurs after the auction where you can still regain your home. You would need to pay not only the outstanding mortgage but all foreclosure costs incurred.
It’s important to note that every step in this process is put into the public record and becomes a black mark on the borrower’s credit that will remain for seven years.