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Can't afford reset payment? Options exist

By Holden Lewis •

When the monthly payment rises on an adjustable-rate mortgage, or ARM, borrowers have a number of options. Most will simply continue to pay the mortgage, even if the payment rises along with the interest rate. Very simple, and a surefire way to prevent foreclosure.

Another way out is to sell the house quickly. Another option is to refinance the loan.

What if it's impossible to make the monthly payments anymore, and you owe more than the house is now worth? In that case, you can't afford to sell and no lender will refinance the loan. It's a dire situation, but foreclosure isn't the only possible outcome. Options include a repayment plan, forbearance, modification, deed in lieu of foreclosure and short sale. The final option is foreclosure, be it contested or "jingle mail."

Some of those options might not be available to you. That's up to the mortgage servicer -- the company that accepts your monthly payments. Before calling the servicer, familiarize yourself with these options.

Options if new payment is unaffordable

• Repayment plan

• Short sale

• Forbearance

• Foreclosure

• Modification

• Negotiating with servicer

• Deed in lieu of foreclosure

Repayment plan

When you fall behind on the payments, you'll talk first with someone from the mortgage servicer's collections department. The collections department's aim is to get you caught up, and the sooner the better. The employees there will demand at least a partial payment now and the rest of the payment soon -- and a promise that you'll pay on time each month after you're caught up.

That's fine as long as your financial problem is short-term and you can afford to catch up and stay current on the payments in the future. If that looks unlikely, you need to talk to someone in the mortgage servicer's loss mitigation department.

The loss mitigation department's goal is exactly what it sounds like -- to cut the lender's losses when you fall behind. You'll need to be prepared before you talk to someone from the loss mitigation department, which will present one or more of the following options.

Effect of a successful repayment plan on your credit record: Minor to moderate, depending on how far you fell behind. Less than 30 days late will put a minimal ding on your record; 30 to 59 days late will put a minor but noticeable dent in your record; 60 to 89 days is worse. If you fell behind by 90 or more days, but eventually caught up, your credit score will drop quite a bit, possibly enough to put you into subprime territory. When you fall behind by 30 days or more, that is counted as a delinquency. Two or more delinquencies are worse than one.

Forbearance

The loan servicer might agree to suspend payments for a few months, until you get back on your feet financially. A forbearance isn't for an indefinite period; it might be for one or three or six months, and after that, you'll be expected to make full payments on time.

Forbearance is most commonly offered to disaster victims and people who have lost their jobs but who feel confident they'll find well-paying employment quickly. After the forbearance period ends and you've resumed making monthly payments, the service will expect you to pay extra each month until you're caught up. In most cases, you'll be expected to catch up within a year or 18 months.

Effect of a successful forbearance on your credit record: Minimal to moderate, depending on the circumstances. A disaster-related forbearance, such as the ones handed out en masse after Hurricane Katrina, isn't supposed to have a negative effect on one's credit report. If you fell behind on your payments because of personal issues (such as illness, job loss or divorce), the impact on your credit report is similar to that for a repayment plan.

Modification

A loan modification is similar to a refinance: The lender agrees to alter the loan, but with few or no fees. The lender might reduce the interest rate, change the loan from an ARM to a fixed-rate mortgage, or raise the monthly payment by a few dollars so you pay off the entire loan, including the past-due amount, by the loan's original end date.

Less frequently, the servicer will tack the missed payments onto the end of the loan. In other words, if you got a mortgage in June 2004 and it's supposed to be paid off in June 2034, but you miss three payments, the servicer could add those three payments to the back end and push the payoff date to September 2034.

Effect of a modification on your credit record: Minimal to moderate, depending on how far behind you fell on your monthly payments.

Deed in lieu of foreclosure

This option often is referred to as a "deed in lieu." The borrower offers to hand over the deed to the property so the lender can take possession of the house and sell it. The lender can refuse to accept a deed in lieu of foreclosure, and it often does, for a couple of reasons. First, the lender has to incur the costs of fixing up the house and paying real estate commissions. A short sale is preferable. Second, the lender inherits any problems with the title. Foreclosure clears away many title problems.

Most lenders prefer to go with either a short sale or a foreclosure.

Effect of a deed in lieu of foreclosure on your credit record: Severe.

Short sale

In a short sale, you sell the house for less than you owe. You can't do a short sale without the lender's permission, which means the lender calls the shots.

With a short sale, you make necessary repairs to the house; pay the real estate commission, taxes and government fees; and give the lender whatever money is left over -- a partial payment. Borrower and lender walk away, neither completely satisfied with the compromise.

Effect of a short sale on your credit record: Severe.

Foreclosure

With a foreclosure, the lender takes possession of the house, evicts the tenants, and puts the property up for sale.

Some borrowers don't resist foreclosure and don't wait to be evicted. Instead, they move out, drop the house keys into an envelope and mail it to the servicer. This is known as "jingle mail." Maybe some jingle mailers believe they're preventing foreclosure, but they're not. The lender forecloses on the property, and the foreclosure goes on the borrower's credit record.

Effect of a foreclosure on your credit record: Devastating and long-lasting. It remains on your credit record for at least seven years. Avoid foreclosure if possible.

Negotiating with the servicer

When you're past due on the mortgage and you realize that you can't catch up, call the loan servicer as quickly as you can, says Cate Williams, vice president of financial literacy for Money Management International, a national credit counseling agency. The phone number will be on the coupon book or monthly bill.

Williams suggests doing a couple of things before making that call. First, cut monthly expenses as much as possible. Many people in mortgage trouble have already done this over a period of months. Next, write a monthly budget in a legible format that you can fax or e-mail to the mortgage servicer.

"Make sure it's realistic and honest," Williams says. "Don't include on your monthly budget that you need your nails done every two weeks."

Have bank statements and paycheck stubs ready, in case the servicer wants copies of those, too.

You'll have to do a tedious song 'n' dance with the collections department. Insist that you want to talk to someone in loss mitigation. Be persistent. Eventually, the collections person will exhaust the scripts and transfer you to loss mitigation.

When that happens, be ready to suggest a remedy. Maybe your monthly principal and interest recently jumped from $1,100 to $1,700. You can't afford the new payment, but you could handle principal and interest of $1,400. You could ask to have the loan modified to a fixed rate with that payment.

Remember, this is a negotiation. When you bought the house, you had a walk-away price for the property -- if the seller refused to go below that price, you would walk away and buy another place. Similarly, you need to figure out, before calling the servicer, the maximum monthly payment you can afford and what terms you're willing to accept.

"Be in a negotiating position, rather than in a position of being told," Williams says. "Be persistent. You need to get to somebody that has the ability to make a decision."

While being a persistent, tough bargainer, you also have to acknowledge that you can't get everything you want. If you must leave your house, try to do it as much as possible on your terms -- with the least possible damage to your credit report, your family life and your physical and mental health.

Contact Brown Realty Group for more information at 916-956-6061 or Info@

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