Watching your neighbor with the three cars, RV, and boat get a mortgage bailout and a lower rate--while you keep paying more--is tough. You'd like to refinance to a better rate, but your home value is down and there's no equity for refinancing. And there's your irresponsible buddy down the street, seemingly being rewarded for his spendthrift behavior. You can't beat him--should you stop making your mortgage payments and join him?
Homeowners nationwide are feeling the sting. "It's a problem," says Mark Zandi of Moody's Economy.com in a USA Today interview. "A lot of the programs require you to be at some stage of delinquency, so homeowners say, 'What about me?' and they get delinquent in order to get help." Most lenders won't even talk to you about a mortgage modification unless you're 60 to 90 days late on your payments, which could have the effect of encouraging homeowners to stop struggling and let the payments go for a few months. Then, hopefully they can put the screws to their lenders and get a better deal.
That strategy is pretty risky, though. When you apply for a modification, you are pretty much applying for a mortgage all over again. Lenders scrutinize your debts, assets, and income, and determine if you should be able to make your payments. And it's easy for a homeowner to miss qualifying for help--first, mortgage lenders expect you to put your mortgage first--so if you are paying your credit cards, auto loans, and other debts, your lender will not be impressed. Second, if your income is so low that you can't come close to paying your mortgage, the lender may feel that modifying your home loan would just put off the inevitable foreclosure and refuse to help.
Trying to work the system is a risky game. Even a single late mortgage payment on a credit history is considered serious. Multiple late payments could keep you from getting decent rates on credit for years, and can even cause your insurance rates to increase or make it hard to get a job. If you get behind on your mortgage, and don't qualify for a modification, you will have trashed your credit for nothing and could lose your home as well.
And consider that the economy and housing markets always bounce back. You will eventually be in a position to take advantage of that. So suck it up, keep paying your mortgage on time, and know that in the long run you will be much better off than your neighbor with the crappy credit.
