Living Frugal
Help, I Can't Afford the Mortgage

You aren't the only one saying "I can't afford the mortgage on my home".

As foreclosures continue and the economy continues to be sluggish, there are lots of people saying the same thing. Don't lose hope, there are mortgage options.

As we quickly approach the middle of 2013, foreclosures are on their way down. According to a report released by RealtyTrac ( the rate of foreclosures in February increased 2 percent since January but are still down 25% since February of 2012. 

If you are facing a foreclosure, there are a few options you can consider trying to avoid foreclosure. These options could get you in a spot to where you can afford the mortgage if you want to keep your house.

Contact the Lender

  • The first step should be to contact your lender. The banks have too many foreclosures on their books now and they don't want to add yours. 
  • For lenders, foreclosure is a dirty word. Banks aren't in the real estate business and they never intended to be. It's in their best interest to help you afford the mortgage on your home.
  • The key here is to contact your lender before attorneys get involved. The lender may be willing to work with you. They are more interested in working with you to get their money, than to foreclose and get nothing but your property. They wind up sitting on the property for months and then having to cut the price just to move it. 
  • It's in their best interest to work with you. If you need help with mortgage lenders, report them to the government for their lack of response. File a complaint against your bank or lender to the Federal Reserve.

Consider Refinancing or Apply for a Loan Modification

  • Many people are still upside down on their mortgages, owing more than what the house is worth. In the good times, the banks and mortgage companies were very unethical when handling loans. The government has stepped in to provide options for homeowners who are upside down or who can no longer afford the mortgage payments on their home.
  • If you meet requirements, you could be eligible for the Making Home Affordable Program (Federal Loan Modification Program). The loan modification program allows you to work with the bank to either refinance at a lower interest rate or modify your loan so you can afford the mortgage.
  • Modifying your loan is not something the bank has to do, it's totally voluntary on their part. However, if you can't afford your mortgage, they know it's in their best interest to work with you.
  • When push comes to shove, the bank is more willing to modify your loan than they are having to foreclose and sit on your property before selling it at a bargain price. They prefer to work with you to modify the loan. This could entail them re-financing with better terms and rates, increasing the term of your remaining loan, cutting the interest rate or even cutting the principal amount since you are underwater. Keep in mind if the principal is cut, you may have to pay taxes on the amount of debt forgiveness.
  • If this is the option you want, be very clear with the bank. You are your own advocate in the process and you should be extremely clear that foreclosure is the only other option. You're the only one that can convince them you are willing to pay if you can afford the mortgage on your home.
  • Following up is the key. Banks are inundated with requests just like yours so remember, the squeaky wheel always gets the grease.

**Find out if you are Eligible for a Mortgage Loan Modification and save your home.

Sell Your House

  • Unfortunately, due to the decline in housing values you may not have this option if you owe more than your house is worth.
  • If this is your situation, look at the following options

Short Sale - Contact the bank about a short sale. Just like in a loan modification, the bank does not have to agree to a short sale. Be very clear with them that you can't afford the mortgage. They know a short sale is the better option for both you and them.

Definition of Short Sale - A short sale is where the bank takes your property for what you owe on it, even though the property is not worth the debt owed. Do your homework here and be sure it's in writing that you are released from paying any deficiencies of the loan. You could be surprised by having to pay debt on a property you no longer own. Consult a tax adviser regarding any tax consequences of a short sale.

Short Sale or Foreclosure?

A short sale is by far the better option. As long as you have it in writing that you have been released from your mortgage and any deficiencies from the loan, you are free and clear of the mortgage.

**Details on what's your best option - Short Sale or Foreclosure

Deed in Lieu of Foreclosure

If a short sale is not an option, you may qualify for a Mortgage Release otherwise know as a deed in lieu of foreclosure. The process consists of you voluntarily transfer ownership of the property to the owner of your mortgage in exchange for a release from the mortgage loan and payments.

A Mortgage Release is an option to avoid foreclosure. You should consider it if any of the following is your situation:

  • You are ineligible to refinance or modify the mortgage
  • You are facing a long-term hardship
  • You are behind on your mortgage payments or will fall behind in the near future.
  • You are upside down in your home owing more than it's worth.
  • You have been unable to sell your home.
  • You can no longer afford the mortgage on your home and are ready to leave.

It totally depends on your situation but you may be required to pay to receive a mortgage release. Weigh the option, it may be worth it to get out from under a mortgage on a home that is no longer worth what it once was.

Declare Bankruptcy

Do your research if you have decided to file for bankruptcy and seek legal counsel.

The big factor in filing bankruptcy is that it all depends on the type of debt you have, whether or not all of your debts are canceled.

Bankruptcy is a good option for eliminating credit card debt or medical related debt.

  • If you file a chapter 7 bankruptcy, the debt is discharged at the end of the rulings.
  • If you file for Chapter 13 bankruptcy, you have to pay off a portion of your unsecured debt through an agreed upon repayment plan. 

If you have debts secured by property (cars, home, boat), the bankruptcy filings do not mean that you get to keep the property.

If your goal in filing bankruptcy is to save your home, consider other options first because there's no guarantee you'll keep your home.

Walk Away

Simply walking away from your mortgage isn't the best option without pursuing all the other options first. Walking away from your mortgage will impact your credit score approximately 150 points.

However, that's not the biggest negative in the decision.

  • The lender can sue you for their losses on your foreclosed property.
  • This can haunt you for many years so absolutely pursue other options that are out there before considering walking away.

**The Consequences of a Strategic Default

Avoiding Scams

  • Be careful of any third party offering to resolve your mortgage problems. 
  • Make sure they are reputable and are backed by the Better Business Bureau.
  • There are many scams out there in this market promising to solve all your debt problems.
  • Don't believe anyone that promises to solve your problems for a fee or that asks for you to sign over your deed. 
  • Solving your mortgage crisis will not be fast or without some aggravation. 
  • Don't believe anyone that promises you otherwise.

Don't lose hope. There are many other options to help you afford the mortgage. 

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