loan modification information

When facing foreclosure, most homeowners think they have two options – pay up or move out. The fact is that you probably have about a dozen options – everything from refinancing to loan modification to selling your home or simply walking away and abandoning the property.

Options for Keeping My Home

Loan modification: Also called a mortgage modification, loan modification enables you to negotiate a workout solution with your lender to catch up on late or missed payments and lower the monthly mortgage payment by adjusting the terms of the loan. Your lender may be willing to lower the interest rate and extend the term (and perhaps even reduce the principal, although this is rare) to make your monthly house payment more affordable and help you catch up on any past due amounts. This is currently one of the best, most available and most popular options.

Forbearance: Forbearance provides you with a payment plan for catching up on missed payments. You’re typically allowed to pay a few hundred dollars extra each month over the course of 18-24 months to catch up.

Reinstatement: If you can borrow the money needed to pay any balance that is currently overdue, your lender may reinstate the loan, allowing you to continue making monthly payments as though nothing ever happened. (This is a practical option only if you have recovered from a temporary financial setback and can now afford the house payment along with any payments required to pay back the new loan.)

Refinancing: Given the fact that credit is still pretty tight right now (as of Feb. 2009), this option may not be available. If you can qualify for a fixed-rate, low-interest loan to pay off a higher interest loan and perhaps even consolidate your debts, refinancing could be one of your best options.

Short re-fi: With a short re-fi, your lender agrees to accept as payment in full less than is required to pay off the balance due on the mortgage, and you take out a refinance loan to make that payment in full. The end result is that you have a new mortgage with a lower balance and lower monthly payments.

Government loan programs: The federal government, through FHA, offers down-payment assistance programs and is developing other programs to enable homeowners to keep their homes. Contact your local HUD office to find out what’s currently available.

Bankruptcy: If you’re buried in unsecured debt, including credit card debt, bankruptcy may be the best option. Even if you’re not considering bankruptcy, it’s a good idea to consult with a bankruptcy attorney to explore this option. It could be the best option for you.


Foreclosure Basics

Foreclosures vary from state to state. The following information will help you to understand the California foreclosure process.

California is known as a Title Theory state where the mortgage company (i.e. bank) holds the title to the property while you live on the land and continue to make mortgage payments. The document that secures the title is usually called a “deed of trust” but may also be referred to as a mortgage. California has a complicated set of rules concerning foreclosures. More on the foreclosure process described below can be found at links below.

How are mortgages in California foreclosed?

In general, foreclosure means that when you miss a payment or two, the bank sends an official notice that you are in the foreclosure process. Then you have a period of time to cure the deficiency. If you cannot do that, the mortgage company pursues foreclosure through either judicial or non-judicial means. An auction is then held and the property is sold to the highest bidder. The primary method of foreclosure in California involves what is known as non-judicial foreclosure. This type of foreclosure does not involve court action. When the deed of trust/ mortgage is initially signed, it will usually contain a provision called a power of sale clause. This allows the trustee (usually a title company) to sell the property to satisfy the defaulted loan. The trustee acts as a representative of the mortgage company to sell the property, which typically occurs in the form of an auction. California has a requirement known as the one-action rule. If a foreclosure is completed by non-judicial means (outside of court), then the mortgage company cannot pursue a second action at a later date if the auction proceeds do not meet the amount due on the property. If a foreclosure is judicial, the house may be sold and a separate judgment may be obtained for the remaining balance due on the loan (up to the full amount of the loan plus foreclosure costs) if the auction proceeds do not cover the balance due on the property. Most loans are foreclosed using non-judicial foreclosure, but a mortgage company has the option of using judicial foreclosure. Since this process takes longer than non-judicial foreclosure, it is rarely used. In California non-judicial remedies have stringent notice requirements and the mortgage documents are required to contain the power of sale language in order to use this type of foreclosure method.

Abandoning your home

Walking away is an option but it is not always the best option, because it can leave some legal strings untied. In some jurisdictions, for example, your lender can sell the house at auction and then pursue a deficiency judgment against you for the difference between what the house sold for and the balance of the mortgage.

MERS – links to sites with the latest news

Judicial foreclosure

A type of foreclosure proceeding that is handled as a civil lawsuit and conducted entirely under the supervision of a court. Used only in lien theory states.

Non-judicial Foreclosure

A foreclosure process that does not involve court action. This method is typically used in title theory states in which a trustee or other party effectuates a foreclosure sale.


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Bankruptcy & Foreclosure

If you’re buried in unsecured debt, including credit card debt, bankruptcy may be the best option. Even if you’re not considering bankruptcy, it’s a good idea to consult with a bankruptcy attorney to explore this option. It could be the best option for you.

Loan Modification

Loan modifications can provide much needed relief for individuals facing foreclosure. However, homeowners must also beware of the growing number of loan modification scams that prey on consumers. The resources below provide information on loan modifications and how to avoid loan modification scams.

HAMP Program

If you are not unemployed, but you’re still struggling to make your mortgage payments, you may be eligible for the Home Affordable Modification Program (HAMP®). HAMP may lower your monthly mortgage payments in order to make them more affordable and sustainable for the long-term. If you currently occupy your home as your primary residence, we encourage you to contact your mortgage servicer as soon as possible to begin the HAMP evaluation process.

In an effort to continue to provide meaningful solutions to the housing crisis, effective June 1, 2012, the Obama Administration expanded the population of homeowners that may be eligible for the Home Affordable Modification Program to include:

  • Homeowners who are applying for a modification on a home that is not their primary residence, but the property is currently rented or the homeowner intends to rent it.
  • Homeowners who previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower.
  • Homeowners who previously received a HAMP trial period plan, but defaulted in their trial payments.
  • Homeowners who previously received a HAMP permanent modification, but defaulted in their payments, therefore losing good standing.

If you are a homeowner who falls into any of these criteria, you may be eligible for a modification under the expanded criteria. Please check with your mortgage servicer to see if you are eligible to begin the HAMP evaluation process.

To apply for HAMP, you need to complete and provide the following:

Request for Mortgage Assistance Form

IRS Form 4506T-EZ or 4506-T

Verification of Income

to your HAMP participating mortgage servicer.

If your mortgage is owned, insured, or guaranteed by Fannie Mae, Freddie Mac, FHA, VA or USDA, ask your mortgage servicer which solutions might be best suited to your situation.

If you have additional questions about getting mortgage help, contact one of our housing experts at 888-995-HOPE (4673). These HUD-approved housing counselors will help you understand your options, design a plan to suit your individual situation, and prepare your application. Research shows that homeowners who work with housing experts like these are more successful and have better long-term outcomes. There is no cost to you for this valuable, around-the-clock service. Help is available in more than 160 languages.

HAFA Program

If you can’t afford your mortgage payment and it’s time for you to transition to more affordable housing, the Home Affordable Foreclosure Alternatives (HAFA) program is designed for you. HAFA provides two options for transitioning out of your mortgage: a short sale or a Deed-in-Lieu (DIL) of foreclosure. In a short sale, the mortgage company lets you sell your house for an amount that falls “short” of the amount you still owe. In a DIL, the mortgage company lets you give the title back, transferring ownership back to them.

In either case, HAFA offers benefits that make the transition as favorable as possible: You can get free advice from HUD-approved housing counselors and licensed real estate professionals.

Unlike conventional short sales, a HAFA short sale completely releases you from your mortgage debt after selling the property. This means you will no longer be responsible for the amount that falls “short” of the amount you still owe. The deficiency is guaranteed to be waived by the servicer. In a HAFA short sale, your mortgage company works with you to determine an acceptable sale price.

HAFA has a less negative effect on your credit score than foreclosure or conventional short sales. *When you close, HAFA provides $3,000 in relocation assistance.

Seek Legal Counsel This information is designed to be of general interest. It should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with an attorney.

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