Wednesday, October 1, 2008

I Can't Pay the Mortgage, Part 2

This is a continuation of a recent post on this topic, and a followup to a post many months ago about what to do if you get a Notice of Trustee's Sale.

Remember from Part 1 of this series that (1) I'm not an attorney and I'm not giving legal advice, (2) you don't need to pay someone to help you out if you're struggling to pay the mortgage, (3) there are many reputable organizations that offer help to homeowners who can't pay their mortgage, and (4) a Notice of Trustee's Sale is not a foreclosure action in and of itself but will result in a foreclosure if the homeowner doesn't do something within 90 days of receiving the Notice in the mail. Read Part 1.

There are a couple of other things that you can do; these are items I tell folks who call me to talk about their options when they can't make the mortgage payment.

1. Approach your lender about a workout plan, a forbearance program, or a repayment plan. "Workout plan" is a generic description of the process of changing the terms of your mortgage. Forbearance allows homeowners to temporarily stop paying the mortgage and catch up later. Repayment plans typically involve sending in your monthly payment with an extra payment to catch up on missed past payments. See also number 3 below.

But realize that these are options best suited for folks with a temporary inability to pay the mortgage. If you've been sick, been in an accident, been laid off, or have experienced some other situation such that you can't pay the mortgage now but (realistically) expect to catch up in the next 6 to 12 months, these options might work for you. See definitions on the HUD site, in the right hand sidebar.

2. If you're in the military, know that there are special programs for you. Tell your lender about your service details and ask for their help.

3. Ask for a loan modification. This is when the lender and homeowner agree to change the terms of the original mortgage. Maybe the bank will write down some of your principal. Maybe they'll extend the payoff timeline. Maybe they'll lower the interest rate. You should definitely consult a real estate attorney and maybe even a financial planner if you're considering these options and get to the stage of looking at documents from your lender. Note that many lenders still aren't offering meaningful help: NewsDay recently reported that 8 out of 10 homeowners who requested lender help with their mortgage arrangements weren't getting it. Don't let that stop you from asking though. A very wise person I know often reminds me, "You never get anything if you don't ask." Hat tip SJN.

4. Get the rest of your financial house in order. Banks do not like accepting short sales. They lose a lot of money and in return, they ding your credit but hard.  If you need to refinance anything (car, student loan, etc), do it now. If your old car won't make it another 2 to 4 years, consider buying another now. After the short sale is over, you'll be living a cash-only lifestyle for several years. Much of your immediate future will be a case of if you can't pay for it in cash, you can't buy it.

5. Consult a credit counseling service. Many homeowners struggling with mortgage payments are also over extended on credit cards. A reputable credit counseling service can help you consolidate your credit card debt, negotiate for lower payments or lower interest rates or both. Reputable credit counseling services do not charge an up-front fee for their services although they may charge a small monthly processing fee. Most are non-profit or not-for-profit entities. If you're having trouble paying your mortgage and/or credit card bills, there's no doubt you're in a rough spot in your life.  A good credit counselor will help you draft a responsible monthly budget that you can realistically stick to over the long haul.

6. Continue paying your HOA dues whenever possible. This one is not really required by law or even by lending standards. But it's just a good karma sort of thing to do. HOAs are usually left holding a lot of bad debt when homeowners default on their mortgages. Sometimes it's several hundreds of dollars, sometimes it can be thousands. Your neighborhood's budget needs for pool care, landscaping, capital improvements, staff salaries and the like don't decrease over the years. If you've moved out of the home and left it vacant, your neighbors' cost to maintain your home might actually increase. Don't stiff your neighbors if you can possibly avoid it.

7. Make sure you've got a good shot at getting the short sale approved. You can do this by gathering the documents noted below, and using them to prove that you can't continue paying the mortgage. Banks will not approve a short sale just because you don't want to continue paying the mortgage. You must prove the payments are beyond your means. You'll need these docs to request help from your lender:

  • At least 2 years' of completed tax returns

  • A couple of month's worth of bank statements

  • At least a month of paycheck stubs

  • The amount of your monthly income including wages, tips, interest income, stock dividends, and alimony payments

  • A list of any other assets such as 401k's, IRA's and cash left in any other bank accounts

  • A complete list of your monthly bills

  • The amount spent monthly for medicine and medical insurance payments

  • Foreclosure Notice or Notice of Trustee's Sale if applicable

  • Letter to lender explaining the reason you can't afford the mortgage

  • It's a great idea to have an attorney and/or accountant help you with this stuff. The bank(s) who hold your mortgage(s) have attorneys on staff to protect their interests. You should too. Need a referral? Call or email me.

8. You can try to sell your home before the foreclosure takes place. Often this results in a "short sale" because today's sale price won't completely payoff your mortgage. Short sales are time consuming and lots of work but can buy you another 6 to 8 months to live in the home while you try to sell. Recently I had a successful short sale that took 13 months from list date to closing date.  Short sales are ugly but the one silver lining is you'll have several months when you're not paying the mortgage and can use that money to get the rest of your finances in order.

This isn't a good time to go For Sale By Owner by the way. If your lender eventually agrees to a short sale, they'll also agree to a Realtor's commission for the work involved in selling. If you put your home up for sale, interview several Realtors before choosing one. Ask about their recent statistics with short sales. How many short sales listed? How many closed successfully? How long did each take? Were those sellers' situations similar to yours? The Realtors can't reveal other clients' confidential finances but they can indicate whether you are like the other successful short sale owners they've worked with. I can't tell you the "right" answers to these questions. But I can assure you that successfully closing 2 or 3 short sales is better than listing 50 but not closing any. That's just common sense, of course!

I hope these points have been helpful if you're having trouble paying your mortgage. Again, I'm going to stress that I'm not an attorney and this is not legal advice. Please don't take these two articles as a recipe for a do-it-yourself fix. You're almost certainly going to need professionals to help you - these might include an attorney, a CPA/accountant or financial planner, and/or a Realtor. Not being able to pay your mortgage can be an extraordinarily stressful time; you might find that talking with a therapist or your pastor/priest/rabbi helps too.

Please call or email me if you'd like to talk about your situation.

Related Posts

  1. I Got A Notice of Trustee's Sale, Now What?

  2. I Can't Pay the Mortgage, Part 1

  3. REO, short sale, lender-owned, foreclosure - what do they all mean?