Help! I can't afford my mortgage!

By Gina Pogol
Mortgage Credit Problems Columnist

Allen Asks: Dear Gina, I'm in sales and business is way down. The last few months I've run through my savings, and soon I'll be unable to make my mortgage payments. My lender won't give me a mortgage modification because I don't earn enough. What are my options?

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Gina says:

Dear Allen,

I'm sorry to hear about your mortgage credit problems. It's too bad that your lender is unwilling to help you. What you do next depends on a few things, and you'll need to ask yourself a few questions.

  • What's my home's value? Am I underwater?
  • How good is my credit?
  • How important is it not to damage my credit?
  • Do I have assets that need to be protected from creditors?
  • Do I have too much debt?
  • Is there a second mortgage involved?

How much do you have to lose?

Your hands may be somewhat tied if you need to preserve your credit rating, if you owe less than your home's value, if you have other assets or if there is a second mortgage.

If your lender can get back most or all of what you owe by foreclosing, it has little incentive to work things out with you. If there is also a second mortgage, you could get trapped between the two lenders as they try to maximize their cut, And if you must avoid bad credit, mortgage lenders have no reason to help you because they know you'll keep making your payments.

You should probably put your home on the market and do your best to sell it. If you must do a short sale and have other assets, you'll probably want to bring in an attorney to help deal with your lender(s). Selling it before you start missing payments allows you to protect your credit rating, and you may be able to negotiate a more favorable notation in your credit history (paid/satisfactory instead of paid/settlement, for example).

If you're in a position of strength

On the other hand, if you owe more than the property's value, have few assets to worry about, and don't care about bad credit, your mortgage lender's not in any position to call the shots. In that case, you could stop paying your mortgage now, to minimize your losses and maybe get your lender to approve your loan mod after all. In Arizona these days, foreclosure takes about six months on average. You may be able to delay even more by dragging your lender into court to contest the foreclosure. Arizona is starting a foreclosure mediation program in Spring 2012; mediation may help you avoid foreclosure or at least slow the process. The idea is that, as long as you expect to lose your home, save as much money as you can while waiting to be evicted.

Going nuclear

The most powerful weapon available is probably bankruptcy. A bankruptcy filing can add months to the foreclosure process. It can also get you relief from your other creditors, keep second mortgage holders from pursuing you and protect your assets and future income. Once your lender knows that you aren't at its mercy, it may reconsider giving you the modification you asked for.

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