MCP Help Blog

A major contributor to the crisis in subprime lending was the loss of home values in many markets. As home values soared, borrowers with bad credit became afraid of being priced out of the market before they could get their credit cleaned up. So they took out subprime mortgages that gave them a 2 or 3 year window to clean up their credit and refinance to a better loan — before the loan converted to an ARM and the rate spiked. The problem is that even those borrowers who did the right thing and got their credit up to snuff ended up being stuck with their bad credit loans because they didn’t have any equity. And now their rates and payments are being yanked up and if this keeps up they may end up with bad credit again — unable to pay their mortgage. Seems very unfair. So if this is you, what can you do about it?

First, have a talk with your lender. One nice thing about having no equity is that there is nothing to take from you, so the lender will probably not be falling over itself to take away your home. Document your income and your improved credit and prove that you can continue to make your old payment but not a higher one. Remind them that your better credit means that you are not the same grade that you were and ask for a better deal — either keeping the loan at its introductory rate or refinancing into a new one at a higher credit grade and presumably a better rate.

Second, look at the FHA Secure program. Take advantage of your improved credit performance and use it to get into a better loan. You need to meet these criteria for eligibility:

1. A history of on-time mortgage payments before the initial rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2009;
3. A small amount of cash or equity in the home (depending on the loan amount and property location)
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

If you don’t have the equity try to come up with cash by borrowing against a 401(k) account, cashing out some investments, or borrowing from family members.

If you owe more than the home is worth you may still be able to get an FHA Secure loan if your current lender is willing to take a second mortgage for the excess or write the loan down to a manageable amount — many lenders will see this as preferable to starting foreclosure proceedings. Your first step in any event is to call your lender’s workout or resolution department and begin a dialog.