Many homeowners haven't paid their mortgage in many months or even years. They fight foreclosure and look for a way to keep their home. After a lot of work, some get approved for a loan modification which returns their loan to normal. Foreclosure disaster averted. Hooray!
But there's one minor problem with getting your loan back to normal: you have to actually start paying a mortgage again. What the heck?
I know, bills are terrible, but getting a free house is not a realistic possibility. Keeping your home after falling behind on payments by getting a loan modification is the best result, and one that millions of homeowners in recent years wanted to achieve and couldn't. (Seven million Americans have been in foreclosure since the recession began.)
However, making a mortgage payment can be difficult when you've become acclimated to not paying it. Suddenly having another bill to pay each month, even if it's much less than it was before, can throw a wrench in your budget and cause you to default again, or re-default.
First Default and Applying For Loan Modification
People tend not to stop paying their mortgage in the first place unless they experience a serious hardship such as losing their job, divorce, or illness. Once the payments stop, the bank starts using the 'f' word: foreclosure.
Most homeowners find the process of applying for a loan modification to be long and difficult. Borrowers are asked to resubmit paperwork they've already submitted, and when the application is finally accepted, it's common for it to be denied.
It's all worth it when a loan mod is approved because the loan is not just returned to normal servicing, the modified terms can be better. Principal can be forgiven, the interest rate can be lowered, the term can be extended to as many as 40 years, and a monthly payment might be significantly reduced from what it was before the default.
Clients of our firm have had more than than $100,000 of principal forgiven and monthly payments slashed by half by getting a loan modification.
Risk of Redefault
However, even when a borrower is fortunate enough to get a loan modification with great terms, they can still have trouble making their payments. There are three main reasons why this happens:
Some homeowners haven't paid their mortgage in nine years or more! That's a long time to not have to budget for an enormous expense. When a loan mod is approved and mortgage payments have to be made again each month, some very disciplined financial planning and budgeting is called for. Being out of the habit of doing that, and of spending so much of your income on housing, can be a difficult re-adjustment to make.
Many homeowners fell behind on their mortgage because they lost their job or got divorced. Now their new job pays less and/or they don't have their spouses income. Even if their payment is lowered under the terms of their loan modification, it may still be a greater portion of their income than they were accustomed to.
The payment is still too high.
Sometimes the monthly payment on a modified loan is barely affordable. Any minor hardship will cause the borrower to default again and end up exactly where they were.
Avoiding a Redefault
You can maximize your chances of having a truly permanent solution to your mortgage problems by taking a few precautions:
- Save money during the loan modification process
- Create a family budget, to control household expenses
- Set annyoing reminders on your phone or make notes on your calendar
- Set up automatic billing so that your new modified mortgage payment is never late to your lender
Can't Afford a Mortgage Payment?
If your income isn't enough to afford the property and the lifestyle you want, consider an alternative to foreclosure such as a deed in lieu of foreclosure or short sale agreement. If you want to stay in your home for as long as possible, foreclosure defense strategies and legal tactics can be used to delay the foreclosure of your home. It may be possible to stay in your home for years before leaving without owing a penny, but there's no guarantee and you would definitely want to consult a lawyer.
Hire An Attorney
Getting a loan modification and/or avoiding foreclosure is too important to do on your own (if you're not a foreclosure defense attorney). Consider working with an experienced professional to ensure that you don't get just any loan modification, but the best modification. That will give you the best odds of avoiding payment shock and getting a mortgage payment that you can afford in the long term.
And keep in mind that, if you do default on your modified loan, it may still be possible to get another loan modification that allows you to keep your home.