Grabbing a Loan Lifeline In Sea of Choices

Seek Mortgage Help Early And Be Ready to Make Sacrifices

For homeowners in trouble with their mortgage, navigating the myriad programs and groups offering help can be taxing. When is the right time to ask for help? Who should you turn to?

The effort is complicated by the individual needs and challenges of each homeowner, industry officials and consumer advocates say. That means borrowers should start the process early and be aggressive in seeking help, they say.

Loan modifications vary in type and scope but typically include deals to change the terms of a loan -- lowering the interest rate or spreading out the payments over a longer period to make them more affordable, for example. Some lenders charge a fee for changing a loan's terms, while others waive fees if the borrower is able to keep up with their new payments. Any deal will likely be aimed at getting a borrower current on the loan, rather than getting him into a mortgage that will be the envy of all the neighbors.

"Oftentimes they have a sense of entitlement to their home. But the lender doesn't have to do anything except collect on that debt or take you to foreclosure," said Kimberly T. Henderson, director of Housing and Community Development at the Greater Washington Urban League.

In many cases, homeowners can negotiate a loan modification with the lender directly, but can also choose a nonprofit group to act on their behalf. A nonprofit is a good option for homeowners intimidated by the process or with complicated circumstances, lenders and consumer advocates said. Housing counselors are likely to have expertise in negotiating a workout plan and may be familiar with the lender's requirements, making it easier for them to push for the best terms available to make the loan affordable.

"If they have called three or four times and the lender has not been responsive, then they should start working with a housing counseling agency. And if that agency is not helpful, they need to go to the next agency on the list," Henderson said.

But for many distressed homeowners, experts said, efforts should begin with an honest look at their finances. Borrowers should assemble all of their loan and financial documents to have a frank conversation with their lender or a counselor about their expenses. Lenders often require that the homeowner prove that they cannot afford their current mortgage.

"It's a matter of them making a hard choice: giving up a car, giving up a lease," said Suzanne Boas, head of Consumer Credit Counseling Service of Greater Atlanta. "We see cases where they are keeping up with credit cards, but not the mortgage."

For some homeowners, that self-examination can lead to the realization that the loss of their home is inevitable. "It's a matter of getting the client to take an honest look at their situation, their income. If we take their financials and do an assessment and they do not have enough money for their mortgage, then we do have to look at the option of them leaving the home," Henderson said. "Then the goal is to leave with as little damage to their credit as possible."

Some lenders, including Citigroup, have programs for borrowers who have not missed a loan payment but are concerned they will soon. For homeowners with adjustable-rate mortgages, worried that a higher interest rate could make their payments unaffordable, that period before delinquency may be an important time to strategize.

"If you are really worried that you're going to have a problem, now is the time to cut back on your discretionary spending," Boas said. "It is hard to do during the holidays, but it is not impossible to curtail short-term spending. Prioritize your spending, strip yourself down to your priority budget."

But many lenders exclude homeowners current on their mortgage and focus on delinquent borrowers. For example, a program run by the Federal Deposit Insurance Corp. for customers of IndyMac, the bank that failed this summer, is restricted to homeowners already 60 days delinquent. Lenders still urge homeowners to start the process as early as possible. "The less delinquent you are, clearly the easier it is," Henderson said.

The types of mortgage modifications lenders offer vary. Most attempt to lower the borrowers' payments to 40 percent of their gross income or less. That can be accomplished by lowering the interest rate of the loan or extending the term to 40 years. In some cases, the lender may agree to reduce the principal owed on the mortgage, but those offers are considered rare.

Before accepting any modification deal, borrowers should take the time to understand the deal they are being offered. For example, if the lender is offering to reduce your interest rate, determine whether the new rate will be permanent or begin to adjust after a set period. Borrowers should ask whether they will be charged any fees to obtain the modification and whether those fees can be waived.

And homeowners should weigh the long-term implications of a modification program: Under one modification program through J.P. Morgan Chase, some clients may be offered an interest rate as low as 3.5 percent, but the first 10 years of payments go only to the loan's interest. Under the Department of Housing and Urban Development's program Hope for Homeowners, borrowers refinanced into a new mortgage are required to share the profit if they eventually sell the property.

These are all issues that should be considered before accepting a loan modification, housing experts said. Understanding the type of modification being offered can prevent the homeowner from wasting savings on the wrong deal.

"The homeowner needs to know what the parameters are, what the possibilities are, so they end up with a loan where they are not struggling every month to make the payments," said John Taylor, president of the National Community Reinvestment Coalition. Otherwise, it "just postpones another default. It is important to get the type of modification that will sustain them over the long term in the home."