When loan modifications aren’t enough, it may be time to give up your home

February 15, 2013

The good news is that we got a loan modification. Unfortunately, the amount is now too high because my husband’s income has decreased. My income is just enough to cover our house payment and his isn’t enough to pay for all of the rest of our monthly expenses. Can I try to appeal the amount by reapplying with our lower income figures?

One of the reasons the Home Affordable Modification Program (HAMP) has not succeeded is that many of those who were helped have seen their financial standings worsen and then have had to default on the modifications.

We know you’re in a tough situation, but it’s time for you to take a step back and look at your finances — and the really big picture. It may be time to think about giving up your home and moving into something that’s less expensive. One big mistake we see homeowners make over and over is trying to keep their homes at the expense of everything else. At some point, you’ll be better off letting your home go into foreclosure.

Let’s start with your permanent loan modification. That modification should have reduced your monthly loan payments to about 31 percent of your income, whether by principal reduction, lowering of interest, extending the loan term or some combination of the three.

Before we address the issue of whether you should reapply and try to get another reduction, you need to determine whether staying in this particular home is right for you in the short and long term. The natural instinct for all of us is to try to keep our homes — those places we love the most — at any cost. However, that might not be the best financial move for your family.

At this point, your income pays the monthly mortgage payments. It’s highly unlikely that you’d be able to get the lender to reduce the mortgage payments sufficiently to get the payment down to a level where the home would be “affordable” for you. Your lender might have to reduce its current loan payment amount by more than two-thirds to get you to a point where you’d feel comfortable making the monthly payment.

Given this reality, unless your husband finds a way to increase his pay quickly, your mortgage lender will probably not give you a new modification. Keep in mind that the lender must use other figures when computing your housing expenses, including your real estate tax bills and insurance costs. Because real estate property tax and insurance payments will continue to rise, the lender would have to reduce the loan payment amount to a greater extent to make your monthly payment affordable. We wouldn’t bet on that happening.

As you ponder your choices, you could try to sell the home. If you have equity in the house, you can use that money for housing expenses to take you through this difficult period. If you don’t have equity in your home — if your home’s value is less than what you owe your lender — you can try to sell the home in a short sale. You’ll have to find a buyer, get your lender’s approval and then close on the sale.

Another option is a deed-in-lieu of foreclosure. In this situation, your lender allows you to transfer title to the lender without having to go through the process of finding a buyer for your home and going through the lengthy short sale process. The deed-in-lieu process appears to be available to underwater homeowners with mortgages held by Fannie Mae and Freddie Mac.

If you have made your mortgage payments on time, your home is underwater and you have a hardship, leaving your home behind may be something to consider.

Ilyce R. Glink’s latest book is “Buy, Close, Move In! Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce’s radio show toll-free (800-972-8255) any Sunday from
11 a.m. to 1 p.m. Contact Ilyce and Sam through her Web site, www.thinkglink.com.

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