Real Estate Law Article: Negotiating a Workout
If you are facing a foreclosure, you have several program options in negotiating a workout with your lender. Here are a few of the best programs:
Making Home Affordable Modification Program
The Making Home Affordable Modification Program, or HAMP, is a government-sponsored program that allows you to lower your monthly mortgage payment to 31% of your gross income. The lender will typically lower your payment by lowering the interest rate and extending the length of the loan although a principal reduction or forbearance is possible. The interest rate will be fixed for five years and then adjusted upward by 1% per year until the interest rate cap is reached. The costs of the foreclosure as well as any unpaid taxes or insurance will be added to the principal balance of the modified loan.
Only a mortgage in first position may be modified under this program. If you have a second mortgage, it usually must be extinguished first. Often, an incentive is paid to the mortgagor in first position to help satisfy any junior lien holders. Speak with a HUD-approve counselor or a real estate attorney to determine how to handle your second mortgage in this situation.
You will also receive an incentive if you stay in the program. Each year for five years you will receive a $1,000.00 payment that will be applied to the principal balance of your loan.
The lender will usually suspend the foreclose proceedings while they consider you for the HAMP program. If you are accepted, you will have to make three monthly payments on a trial program. If you make these three payments your modification will be permanent. If you miss any of these payments, you will not receive a permanent modification and the foreclosure proceedings will resume. However, the Home Affordable Foreclosure Alternatives, which is part of the HAMP program, has a streamlined process for short sales or deed-in-lieu of foreclosures for homeowners who cannot complete the program.
To be considered for this program, your home must be your current residence, the amount you owe on your first mortgage must be equal to or less than $729,750.00, you must have recieved your current mortgage before January 1, 2009, your payment on your first mortgage must be more than 31% of your current gross income, and you must have trouble paying your mortgage. Visit www.makinghomeaffordable.com to determine your eligibility for this program.
You may only modify your loan once under this program. This program is scheduled to end December 31, 2012.
Making Home Affordable Refinance Program
This program is designed for homeowners who are current on their mortgage but wish to refinance to a more affordable loan. If you are current on your loan and your house is not to far underwater, you can likely refinance your mortgage to a fixed-rate, low-interest loan.
If you refinance into a 15 or 30 year fixed-rate mortgage, your payments will likely not be lowered and may actually be higher. However, the advantage is that you have stability moving forward and can avoid any interest rate increases in your original mortgage. The new loan will not include any balloon payments or prepayment penalties and the interest rate will be based on the current market rate. The only amount added to your principal balance will be transaction costs. A lender cannot receive cash from this loan.
To qualify for the Making Home Affordable Refinance Program, you must have a loan owned or controlled by Freddie Mac or Fannie Mae. Typically, you can only miss one payment in the last 12 months and you must be no more than 5% underwater on your home. This program only applies to loans in first position. The home you are trying to refinance must also be your principal resident. Visit www.makinghomeaffordable.com to determine if you qualify for this program.
This program is set to end on June 30, 2011 but may be extended.
Hope for Homeowners Act
If you qualify under the Hope for Homeowners Act, you can have your mortgage principal reduced to somewhere around the current value of your home. The principal balance and interest rate of your loan will be reduced based on the current value of your home and refinanced into an FHA-insured loan.
Your lender must be willing to accept a buyout of your loan for 90% or less of its current value. If you have a second mortgage that lender must also agree. A lender of a second mortgage may sign off if the original lender agrees to share a portion of the proceeds or the federal government offers the second lender other financial incentives.
If you receive refinancing under this program, you will be required to share any future appreciation with the federal government. You may also have to share the appreciation with any junior mortgage holder who agreed to the buyout and suffered a loss. Thus, you may end up sharing between 50% and 100% of any future appreciation.
To qualify your total debt must be 31% or more of your monthly gross income. You must also produce two years of tax returns to prove that you have a steady income and can afford the payments moving forward. The home must also be your primary residence and you must have obtained your first mortgage on or before January 1, 2008. You also must not have intentionally defaulted on your mortgage or any other debt you have had in the last five years. Any type of mortgage qualifies under this program. If you have a net worth of over $1,000,000.00 you are excluded from this program.
A loan will not be given for more than $550,440.00 for a single-unit property.
This program is set to end on September 30, 2011 but may be extended.
In-House Programs
If you do not qualify for any of the government-sponsored programs, you can attempt to modify the terms of your mortgage by working directly with your lender. If you have only missed a payment or two and you have not received a notice of intent to foreclose, then you likely can work out a modification with your lender.
You can use a HUD-approved housing counselor or a real estate attorney to help you negotiate with your lender.
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