If you cannot afford your mortgage you may have to give up your home. But you may be able to have more control over how you give it up and avoid foreclosure.
Remember, you may be able to keep your home:
- Contact the bank and ask if you can work out a plan to keep your house.
- Get in touch with A HUD-approved housing counseling agency to find out what you can do.
Staying in your house
Modify your mortgage
You and the lender agree to change the way you pay back your loan, or the “terms” of the loan. This is “modification.” The bank * may agree to:
- lower your interest rate,
- change the total amount you owe -reduce the principal,
- add your missed payments to the loan so you are no longer behind, but you still end up paying the amount you owe, or
- give you more time to repay the loan – extend the loan.
Banks modify loans so you can pay them back. They want you to be able to catch up your on your payments.
It can be hard to get a modification. You want to be sure they get all of the paperwork you send. You also want to be sure that they do not need anything else from you.
If you are trying to get the bank to modify your loan,
call the bank every week and keep track of :
- the date you phoned
- who you spoke with,
- what they said, and
- the documents you send them.
Example chart to track communication with bank.
Date you phoned or sent documents
Name of the person you spoke with on the phone
What the person said
Documents you sent
No they have not yet received taxes and payslips and bank statements
Yes they did get taxes, payslips and bank statements but they need W-2 forms
Copies of w-2 forms
If the bank agrees to modify your loan, they will send you a loan modification agreement .
If the bank sends you a modification that lowers your current payments but has a “balloon” payment at the end you may not want to sign. A balloon payment means the bank separates of the original amount you borrowed, the principal, into two lumps.
They charge you interest on one lump. You can pay this lump off slowly each month.
They do not charge interest on the 2nd lump. But once you have paid off the first lump and all the interest on it, you are left with one large lump you must pay off all at once.
Usually banks offer a balloon payment because you do not have enough money to pay interest on the entire amount of the money you owe. None of your monthly payments lower the balloon payment amount.
Think very before you sign a loan like this. If you cannot refinance or pay off the balloon payment at the end of your regular payments you may end up losing your house after you made payments for many years.
If you agree with the terms of the modification, they will ask you to sign the agreement. Read all of the terms very carefully before you sign it. There is usually a deadline to sign and send it back. Make sure you send it back by the deadline.
If you have trouble getting a modification or you have a problem with the bank not getting back to you, losing documents you send, or other problems, file a complaint with the Attorney General’s Homecorp team.
Spread out the missed payments over a longer term- Repayment
If your payment is, $1,200 a month, and you miss one payment, the lender might let you add $100 a month to each payment for a year until you are caught up. This is an example of a ‘repayment plan’.
A repayment plan divides the total amount you owe into smaller monthly payments until you pay back the total amount of payments you missed. The amount you have to pay every month will be higher than your regular monthly payment was. You must be able to pay the higher amount.
Repayment is a good choice if you lost your income for a short time, but now you make enough so can pay regularly again. Often banks do not put repayment plans in writing. You are not current until you have paid all of the missed payments. If you do not follow the repayment plan, the bank will foreclose.
Add the missed payments to your loan balance
You or another owner of the property may be able to get a new mortgage to pay off the current mortgage . If your house is worth more than the loan amount, you may be able to get a new loan with better terms. This is called a refinance.
If you have missed too many payments you may not qualify for a new mortgage.
If your house is worth less than your mortgage, a new mortgage company may not give you a loan.
There are special refinance options for homeowners under the Home Affordability Refinancy Program. This is for homeowners whose homes are worth less than their loan amount. The HARP program written by the federal government. Be sure to ask your lender about this option.
Time to make up your payments
If you have a temporary hardship, the bank may agree not to foreclosure on you for a short time. You need to show that you will be able to pay back the missed payments soon. This is called a forebearance. They may also agree to stop foreclosure if you are selling your home. You must ask the bank to be considered for this option. This is called forbearance.
Example of a temporary hardship
Sally had to have surgery. She was going to get better and go back to work, but she had to take 3 months off from work. Her Disability does not pay her for the first 4 weeks. So she has not income, but she knows she will get disability after 4 weeks and then after the 3 months have passed she will be able to go back to work. Once she gets disability she will be able to pay her mortgage again. Sally can ask the bank for a “grace period” so she does not have to pay her mortgage when she has no income. But she will make up that payment once she gets disability or goes back to work again.
Filing bankruptcy may give you time to avoid foreclosure.
Chapter 7 bankruptcy will not stop a foreclosure, forever. It only delays the sale, but if you are about to get a new source of income like a job, or Social Security, you may be able to user this time to apply for a modification. A chapter 7 case usually only lasts 3-5 months.
A Chapter 13 case can save your home from foreclosure. This type of bankruptcy gives you time to pay the bank your missed payments. It forces the bank into a type of modification of your mortgage.
If you file Chapter 13, you must be able to pay your monthly mortgage payments plus part of your missed payments each month.
When you file Chapter 13, if you want to keep your house, you have 5 years to pay back:
- all the taxes, child support, and court ordered fees you owe. These are “priority debts.”
- All your your missed mortgage payments. And
- You also have to pay a 10% trustee fee. The 10% is 10% of your priority debts plus your missed payments.
Your new payment will be:
- your regular monthly mortgage payment,
- plus the total of the missed mortgage payment, priority debt and trustee fee, all divided by 60.
Frank owes 1000 past-due child support.
He does not owe any back taxes.
He owes the court penalties and interest $150 on the past-due child support.
He missed 3, $1400 mortage payments.
He owes $5,350 all together.
The 10% trustee fee is $535
1/60 of everything he owes + the trustee fee is $98. So he needs to pay the trustee $1,498 every month for 5 years. The trustee pays out the child support to DOR/CSE and the mortgage payments to the bank.
After 5 years his mortgage payment will go back to $1,400, if his mortgage has a fixed rate, and he will be current on his mortgage.
Listen to the MassLawRadio podcast, Facing Foreclosure:
Deed in lieu of foreclosure
You may be able to give the property back to the bank so they do not sell it at auction. You give them back the house, and then you do not owe them any money.
- You must ask them if they will agree;
- The agreement must be in writing; and
- Both you and the bank must sign the agreement.
Sometimes banks try to get you to sign over the property, but they say you still owe them money. Read everything banks send you. Do not sign anything you do not understand.
You do not have the right to sign over your property to the bank and not owe them any money. But you can ask. Usually banks only agree to a deed in lieu of foreclosure if you have a realtor and the property is listed for sale.
Selling your home
Selling your home may be the best way to hold onto the money you have already put into your house, your ‘equity’.
If you sell, you have more control over the price of the house.
Also it is better for your credit to sell. Your credit report will show missed mortgage payments. A foreclosure mark on your credit report can make it harder for you to borrow money in the future. If you can sell your home before you miss too many payments, it will be better for your credit. You may be able to buy a new home with a smaller loan that you can afford.
Your mortgage may be higher than what your home is worth.
If you can sell your home for less than what you owe the mortgage company, it is a “short sale.”
It only makes sense to sell your home for less than what you owe the bank if the bank agrees:
- to accept the amount you get from the sale,
- to remove the lien on your property, and
- that you do not owe them any more money.
The buyer gets the house. The bank agrees to accept the sale and you do not owe them anything.
If you decide you want to do a short sale and the bank agrees, make sure you get the agreement in writing.
Some people can stay in their homes by buying the house back. You can buy back your home at the foreclosure auction or afterwards. This is “repurchasing.”
Repurchasing is risky:
- Someone else may buy the house.
- After a foreclosure your credit score may be low and you may not qualify for a new loan to repurchase.
Often a house sells for a lower price at an auction than what a realtor can get.
After an auction if it is listed for sale the price will be based on the price of similar houses in your neighborhood. This price is the fair market value. If your mortgage before the foreclosure was higher than the fair market value then you can save money if you can buy the house back.
If you cannot buy the home directly from the bank there are non-profits that may be able to help. Most banks do not like to sell a foreclosed property to the former homeowner.
In Massachusetts banks cannot stop a non-profit from buying the house and selling it to you.
Beware of scams that make you think you can keep your house, but in the end they will not help you.
See the Attorney General's booklet, "Recognizing and Avoiding Foreclosure Rescue Scams."
Listen to the MassLawRadio podcast, Fair Lending, Mortgage Rescue Scams & the Foreclosure Crisis:
* When we use the word 'bank' we mean your lender. This could be a mortgage company a trust or even a person.