Tag Archive for 'avoid foreclosure'

Yes, Indiana homeowner Lisa Stuart almost lost her home because she didn't know about an unwritten HAMP rule. She was put into a trial modified mortgage and set her account up to automatically make the payment on the 25th of the month. She was concerned that if she set it up to transfer on the 1st, when payment was due, that it wouldn't be credited because one of the trial payment due dates fell on New Year's Day. But GMAC mortgage wasn't impressed by her responsible attitude. Their collection department called her to tell her that she owed them $4,000 of would be foreclosed on, and that she has been kicked out of HAMP for making her payment too early. And that's not the only secret rule that can get you kicked out of the program.

Take your current housing payment -- principal, interest, taxes, insurance, HOA dues, and mortgage insurance -- and multiply it by three. If you have $1 more than that amount in your bank accounts, your trial modification will not be made permanent and the collection department will call. When one lender, Aurora Loan Services, was asked by a homeowner I know, "Well, you say we have $8,000 too much to get a modification, but the collection people want $9,000 from us. If we pay that, we won't have too much money. So can we then get a modification?" The representative answered profoundly, "I don't know."

A quick search on the Internet shows that many people are under the mistaken impression that "reserves" means the amount needed to pay all of your debts. But mortgage lenders don't care about your other debts, and they have no problem with you being unable to repay your other creditors, as long as you can pay your mortgage. reserves, for the purpose of mortgage modification qualification, is only amounts needed to pay your for housing for three months.

So my advice is that if you have too much money to qualify for a modification, consider using the excess to pay off other debt and get yourself some breathing room. It will make it easier for you to get your mortgage modification, and easier for you to honor your modified mortgage obligation in the future.

73-year old James Bruce found an unusual way to pay his mortgage when he got behind -- he robbed 3 banks at $600 a pop to come up with the cash. The guy probably had other alternatives -- he had run through his retirement and so he and his wife only had Social Security to live on and the earnings they could eke out from a small pottery business. He was too embarrassed to ask his lender for help (but apparently not too embarrassed to rob banks!). But Mr. Bruce had options -- he didn't have to rob banks to save his home.

When you can't make a mortgage payment, don't be embarrassed, and don't hide the truth. Mr. Bruce claimed that he had a plan for paying the money back that he stole. He could more easily have requested a forbearance from his bank. A forbearance allows you to skip one or more mortgage payments; the late payments are just added to your balance.

Mr. Bruce had his home for twenty years and never missed a payment. Odds are that he has substantial home equity. A reverse mortgage can pay off a small mortgage balance, relieving the homeowner of the payment, and maybe even put some cash back in the borrower's pocket.

Bad credit wasn't his mortgage problem -- so his lender would have been more likely to help. If he didn't have equity (maybe he borrowed against his home over the years) he might have mortgage insurance. In that case, he might have been granted a claim advance by his insurer -- bringing his mortgage current. That only works to cure a temporary problem, however. A permanent problem requires a permanent solution.

When the homeowner has experienced a significant reduction in income, a mortgage modification may be the best alternative. Mr. Bruce could have used a mortgage calculator to see if taking his remaining mortgage balance and getting a new loan with a 2% rate and a 40-year term would get him a payment of no more than 31% of his gross income. In fact, HAMP underwriters may be able to "gross up" the Social Security income (multiply it by 1.25% if it isn't subject to income tax) to make qualifying a little easier.

The biggest problem with Mr. Bruce's way out (aside from the fact that it was illegal, duh) is that it was only temporary. What was he going to do next month? Rob a train? Knock off a liquor store? Set up a meth lab? The bottom line is a permanent reduction in income can only be solved with a permanent reduction in payments.

Ordinarily, I'd say no, you shouldn't walk away from your mortgage. It's bad for your neighbors, bad for your credit, and bad for the economy. And besides, you're a moral person; you'd feel icky. However, I've also seen countless friends and acquaintances run through their retirement accounts and their kids' college funds and finally their emergency savings to hold on to properties until eventually they went into foreclosure or were short-sold. The owners ended up with trashed credit, no property, and no money. Some of these people are now 55 years old with no savings or investments to show for it. Retirement is looking pretty bleak.

So, What's the Right Choice, the Best Decision for You and Your Family?

Brent White, a University of Arizona law professor, feels that it's unfair to hold homeowners to a higher moral standard than the companies that lend to them. Wall Street banks, after all, make make decisions to strategically default on obligations routinely. Morgan Stanley, for example, recently quit making its payments on several San Francisco office buildings. The buildings were purchased by a Morgan Stanley fund at the height of the real estate boom, and their value is a fraction of the liens against them. Yet no one in the government or the Mortgage Bankers Association has characterized Morgan Stanley's decision as immoral.

But the average American homeowner is supposed to honor his or her debts if at all possible, according to the mortgage industry and the President. It's ironic that former Treasury Secretary Henry M. Paulson Jr., who enjoyed a 32-year career at Wall Street giant and speculator-extraordinaire Goldman Sachs, claimed that "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator--and one who is not honoring his obligation."

What's the True Cost of Walking Away from Your Mortgage?

Your decision to default would not be without consequence. If you live in a state other than the non-recourse states--Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, or Wisconsin--the lender can come after your other assets if the property doesn't fetch enough in a foreclosure sale to cover the outstanding mortgage balance. Expect major legal hassles or even being forced into bankruptcy if you have assets--and presumably the reason for defaulting strategically is to keep from running through all of your cash in the first place.

In addition, there are serious repercussions to your credit. If it's already trashed, that's less of a problem. But the total hit from a series of late mortgage payments and a foreclosure could be as high as 300 to 400 points. Plus, it takes seven years for a foreclosure to disappear from one's credit report entirely. In short, be prepared to have bad credit and mortgage problems for years. "A default will have a serious negative impact on a consumer's credit score and make it more difficult to obtain future credit," said Barrett Burns, president and CEO of VantageScore Solutions, a scoring company created by the three national credit bureaus, Experian, Equifax and TransUnion. But that's not all--bad credit can keep you from getting a job, not good news in today's tight job market. It also affects your ability to get insurance--insurance underwriters know that bad credit often equals a bad risk, insurance-wise.

The Decision: Ask These Questions.

Can you afford the mortgage without hitting up your savings, especially your retirement accounts? If you can, it's probably best to continue paying and wait out the housing slump.

How far underwater is your property? If you owe $500,000 on a $100,000 house, it could take decades to come back. If you live in a non-recourse state or have relatively little to lose, defaulting may be a sensible business decision.

Have you spoken to your lender about a modification? The more underwater you are, the more leverage you should have with your lender. Give it a chance to work with you before pulling the plug on your mortgage. Lenders today are showing more willingness to reduce the principal balance on your loan as part of your modification.

Do you already have bad credit? If your credit is already bad, you have less to lose, credit-wise. If it's good and you plan to make use of it, for example, you are self-employed and need credit to run your company, a strategic default could put you out of business.

Have you spoken to a bankruptcy attorney? Once a lender understands that you are serious about cutting your house loose and possibly avoid a mortgage defiency, you are far more likely to get a mortgage modification.

The Boat Everyone's In

No one--lenders or borrowers--expected to see the housing hysteria that's taking place. And there's no reason to become destitute trying to keep a home. But if you need help paying your mortgage, give your lender a chance to help before walking away--it could be the best outcome for both of you.

The rules change when good economies go bad. Old standbys, like always pay more than the minimum on your credit cards, retire your mortgage as soon as possible, and a home equity line of credit (HELOC) is the best second mortgage because of its flexibility. Today, those rules are good for lining the bird cage but not much else.
Of course, it makes little sense to carry credit card balances month after month, paying high interest rates and other fees, chained to revolving debt for life.On a $5,000 balance at 18%, paying the minimum of $125 a month, it would take 273 months--almost 23 YEARS--to pay that off. And your total interest would be a crazy $6,923.14! By paying just $75 a month more, it would take you 32 months to be rid of your debt. In that time, you would pay only $1,313.96 in interest.

So, why then would it be less than wise to make greater than minimum payments on credit cards in a recession? It isn't--once you have an emergency savings account fully-funded. Because if you have a financial emergency, your credit can be cut back or taken away, and if you have given all of your ready cash to creditors, you will be twisting in the wind.

Credit cards are unsecured debt, which means that your promise to pay is not tied to property, and if you need money to eat and things are tight, you can forgo making credit card payments or negotiate some kind of forbearance until your emergency has passed. Because credit card companies have to look out for themselves and their shareholders, they are likely to cut off your credit just when you need it most. So, you have to look out for you and yours--tap your credit if you see a financial emergency looming, stash your cash in an emergency fund, and do your best to ride out tough times. Once you have enough in the bank to take care of three to nine months of living expenses, get back on track to pay down your debts and restore your financial health.

You don't have to take my word for it--financial gurus like Suze Orman are all recommending that people look after their families first, their finances second. Here's what she says: "If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can."

So get that emergency fund in place. It could help you avoid bad credit in the future and help you avoid foreclosure if you experience a financial emergency.

Reverse mortgages can get seniors out of mortgage credit jams. If you are 62 or better and have substantial equity in your home, you could pay it off with a Home Equity Conversion Mortgage (HECM). You could kiss your mortgage payments (and your foreclosure worries) goodbye with this FHA home loan.

How does this work? Well, many seniors have homes that are paid for or nearly paid for, but they often don't have much income. And if you have insufficient income, it's easy to find yourself in difficulty making your mortgage payments. And then your credit rating suffers and soon you can't qualify for any kind of mortgage help. So what can you do?

1. Invite all of your relatives to move in and pay rent!?
2. Ebay the heirlooms that have been in your family for centuries?
3. Sell your cars and hitchhike to the grocery store?
4. Spend 16 hours a day clipping coupons?
5. Burn your furniture in the winter to avoid heating bills?
6. Revert to your college days and eat nothing but Spam and peanut butter?

Of course you don't want to do those things--you've worked hard and deserve a higher standard of living than that. And there may be a solution. The HECM can be used to pay off your existing mortgage and perhaps even give you some extra cash. The amount you'd be eligible for depends on how much your home is worth, how much you owe, your age, and current interest rates. You could end up with no mortgage payment, and even with some extra monthly income too..

AARP has a reverse mortgage calculator that can show you how much mortgage you'd be eligible for. If it is enough to at least pay off your current mortgage, look into qualifying. HECM loans are different in that bad credit does not stop you from being approved and people with bad credit don't pay higher interest rates than those with good credit. Look into a reverse mortgage today; kick out your relatives tomorrow!

Yes, rates are low. And if you are paying over 6% on your mortgage, you should probably look into refinancing and saving some money. However, not everyone who could benefit from refinancing will be able to do so. Here are three reasons you may not be able to refinance--and what you can do about them. I. ...

All the buzz these days is about the homeowner rescue programs--Making Home Affordable and it's babies Home Affordable Refinance Plan (HARP) and Home Affordable Modification Plan (HAMP). But eligibility for these programs requires that the property be a primary residence. What about investors? Is there any help for them? Investors seem largely left out of the ...