Are You Struggling to Make Your Mortgage Payments?

March 23, 2009
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If you’re struggling to make your monthly mortgage payments, you really have one of four options: 1) loan modification, 2) short sale, 3) bankruptcy or a 4) foreclosure or deed in lieu. Below is some information about each process. However, please consult with your CPA, attorney or legal professional before making any decision regarding your property or legal rights.

Loan Modification   

It’s all over the news, but it’s important to separate the factual from the fictitious. A loan mod is supposed to keep you in your home, provide a lower payment and help you avoid a short sale, foreclosure or bankruptcy. Obtaining a loan modification isn’t as easy as waving a magic wand to make your housing woes disappear despite what you hear from the media and the growing army of opportunists promising you miracle mortgage relief. 

From my discussions with lenders, here’s what I’ve been repeatedly told. “No jobs, no modification,” unless you’ve got proof that you really do have a job lined up. You have to show a real hardship. If you’re employed, you’re still not out of the woods. If your current housing payment far exceeds your ability to pay it, you’re not likely to receive a modification. Part of the reason is your lender is not required to participate in any type of modification program, so the government’s program has more bark than bite.

Now let’s say, your mortgage lender will agree to a loan modification. They believe you’re a good risk to get back on track. All right, but what are you and your lender actually agreeing to? Your lender could agree to lower your interest rate for a certain period, maybe five years. It might only agree to lower your interest rate if you agree to extend the number of years on your current loan. If it keeps the wolf from your door, this solution might be agreeable.

Forbearance is another word you’re probably hearing a lot about lately with regard to loan modifications. Usually, it means your lender will temporarily suspend your payments for a few months before you have to resume them. Suspension doesn’t mean forgiveness, however. The  skipped payments will be put on the end of your loan..You will have to pay back the skipped payments at some point.

You’ve probably also heard about the government’s much ballyhooed Affordability and Stability Plan announced March 4. If you qualify for the program, you’re supposed to see your monthly mortgage not exceed 31% of your income. The difference between what you now pay and and the lesser amount you would pay to get to 31% is money you still owe … just not right away. You have to repay it when you sell or refinance your home. Still, if the program keeps you in your home, it’s worth considering. This program applies to loans taken out before January 1 of this year. Also, you’re out of luck if your loan amount is more than $729,750.

So modifications offer some hope, but they come with several strings attached.

Short Sales

A short sale is a way for both you and your lender to cut your losses. The process is certainly less expensive to your lender than if it were to take over your property through a re-possession. Moreover, because you’re still living in the home, chances are the property is still in a livable and saleable condition. You have an incentive to keep up the property because the bank has agreed to let you sell it for less than you owe. Plus, a short sale has far less impact on your FICO (a downgrade of 80 to 100 points) than either a bankruptcy or a foreclosure. Furthermore, whatever debt forgiveness you receive might not be taxable (IRS Mortgage Debt Forgiveness Act 2007 — Consult with a tax attorney on this.) Sometimes, a Realtor can pull some comps and give you a quick and rough appraisal of what he or she thinks your home will sell for.


Foreclosure often occurs as the result of job loss, soaring medical expenses and other major life traumas. Often some kind of workout solution might be possible, but many times homeowners are in denial about their situation, or, worse, think the problem will miraculously correct itself or disappear. If you’re foreclosed on, the negative impact on your FICO scores could drop 250 to 280 points. Moreover, you could face both tax issues and a potential deficiency judgment.


There’s been growing buzz about a House bill that passed in March. Under the legislation, courts would have the power to force lenders to make principal reductions in Chapter 13 bankruptcies, but the borrower usually has to be working. Chapter 7 filers don’t require a steady income, but the “cramdown” (principal reduction) no longer applies.  Plus, there are sales restrictions. In other words, you can’t turn around and sell your home for a quick profit. If you do, the government will take most of your gain.

Then, of course, there are all of the other drawbacks associated with bankruptcy. The bankruptcy stays on your credit report for 10 years, not to mention many employers often pull your credit report to assess your employability or financial character. Plus, you’re shut out of the Fannie Mae purchase market for seven years. There are filing costs to consider, and the hit to your credit score is about 250 to 280 points.

In summary, try to see the facts clearly. If you feel your mortgage is in trouble, act now. That way, you’ll have more options toward finding a solution. There are free local resources available, many of which are supported by federal programs and grants.  If you need assistance in contacting one of these organizations, please call me today at (909) 374-4744.

By Colleen Bennett

Realtor, Dilbeck Premier Properties, Claremont






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