Life sometimes has a way of surprising us with unexpected challenges. Maybe you’ve been laid off from work or lost a loved one. Perhaps caring for additional family members has put a strain on your finances.
If a life change has made it difficult to make your mortgage payment, don’t bear the burden in silence. Talk to your mortgage servicer. You have options. Quicken Loans® and any mortgage servicer want to do everything they can to help you stay in your home or at least get you into the best situation possible.
We’ll take you through your alternatives. You may find that an option to work with your lender and servicer to modify your mortgage payment will enable you to stay in your home. However, if you no longer have the budget necessary, there are options that will allow you to get out from under it. This can be done with less negative impact than a foreclosure.
In order to decide whether you have the resources to handle a modification, you first need to know how a modification works. This used to be complicated and once depended on which mortgage investor owned your loan. Now things have been greatly simplified, making the process better for both servicers and their clients.
Examining The Standard Modification
If a challenge has caused you to fall a couple of months behind on your mortgage payment, one option your servicer will take a look at is a modification.
The purpose of a modification is to lower your payment to the point where you can afford it. The standard modification accomplishes this in a couple of steps.
You’re given a special standardized interest rate for modification that’s designed to tie closely with current market rates. No matter which mortgage investor you use, they take their interest rate cue from an index available from Freddie Mac.
For some of you, this in and of itself may lower your payment by lowering your mortgage rate. If that alone doesn’t do it, they also have the ability to extend your mortgage term to 40 years, instead of the standard 30 years. By re-amortizing your payments over a more extended period, your payments are substantially lowered. But there are also some specific options that you may find useful.
VA Streamline Refinance
If you’re a veteran and have a VA loan that you’re struggling to pay off, you can refinance at a lower rate with a VA Interest Rate Reduction Refinance Loan (IRRRL). Also known as a VA Streamline, the IRRRL simplifies the refinancing process to ensure that you receive prompt financial assistance.
With an IRRRL, you can adjust the type, term or rate of your VA loan. If you have an adjustable rate mortgage (ARM), you can choose to switch to a fixed-rate mortgage, which will ensure that your rate is locked in and does not increase even if the market fluctuates. You also can extend your loan term to decrease your monthly payments or simply refinance at a lower interest rate.
FHA Streamline Refinance
If you have an FHA loan, you can refinance with an FHA Streamline to lower your monthly payments. However, in order to qualify for this option, you must currently be in good standing with your mortgage. That means, in the last 6 months, you may not have made any payments that were more than 30 days late. And in the last year, you may not have made more than one payment that was more than 30 days late.
If you are in good standing, an FHA Streamline refinance can be a good way to lower your monthly payment. However, there are restrictions regarding how you can do it. For instance, if you want to increase your loan term to decrease your payment, you cannot increase the term by more than 12 years.
Beyond the considerable requirements, a downside of FHA Streamlines is that you’ll have to continue to pay a mortgage insurance premium (MIP). However, the FHA’s guidelines restrict individuals from obtaining FHA Streamline refinances if there isn’t a net tangible benefit. So the only way you can refinance through this option is if it is actually financially beneficial to you.
Dealing With An Underwater Mortgage
For some homeowners, the issue may extend beyond having trouble with a monthly payment. It may be that they actually owe more on their home that it’s worth. If this is the case for you, what you’re dealing with is an underwater mortgage.
Underwater mortgages tend to occur when property values in your neighborhood drop or when you miss a mortgage payment and the interest you fail to pay off accumulates interest. With underwater mortgages, it’s often challenging to sell your home because the lower market value of the property causes the purchase price to be insufficient to pay off your debt. Furthermore, refinancing can be difficult given that you don’t have a sufficient amount of equity in your home.
One option available to your servicer is to set aside some of the excess principal in a process called forbearance. No interest is charged on the principal that’s set aside, and the payment on this remaining principal is due when the rest of the loan is paid off. That being said, there are specific refinance options available if you have a Fannie Mae or Freddie Mac loan.
Fannie Mae’s High Loan-to-Value Refinance Option
If your Fannie Mae mortgage is underwater but you’ve been making your payments on time, you should consider a High Loan-to-Value Refinance Option (HLRO). The HLRO enables homeowners who are struggling to refinance to obtain a lower rate regardless of whether they have equity in their home.
Since this option is intended to help homeowners who have little equity in their home and are in areas where property values have decreased or remained stagnant, you must have a high loan-to-value (LTV) ratio to be eligible. For a primary residence, your LTV ratio may be no lower than 97.01%.
Freddie Mac’s Enhanced Relief Refinance
If your loan is owned by Freddie Mac, their Enhanced Relief Refinance can help you make your monthly payments more affordable. If you’re in good standing but have a high LTV ratio, the Enhanced Relief Refinance will enable you to lower your payments by reducing your mortgage rate, switching your adjustable rate, interest-only or balloon mortgage to a fixed-rate mortgage or decreasing the term of your mortgage.
Options For A Managed Sale
A modification is a great solution if you have the budget and want to stay in your home. If, for whatever reason, you can’t make a modification work, then your servicer will take a look at working with you to sell the house. There are a couple of options for this that won’t hurt as much as a foreclosure from a credit perspective. Let’s go over them.
If you know you’re struggling to make your mortgage payment and don’t want to do a modification, a short sale can help you leave your home gracefully with a smaller credit impact than you would see in a foreclosure. This may be the preferred option for clients who have some equity in their home.
In a short sale, your lender agrees to take less than the full payoff amount in order to find a buyer for the property. This is particularly helpful if you’re in an area where your home might appraise for less than what you owe due to property values not fully recovering.
Deed In Lieu
If you have very little equity in your home and just want the option to leave your home to the lender without having a foreclosure on your record, you can do so with a deed in lieu.
By working with a lender on your deed in lieu, you may be able to obtain some funds to assist in relocating to another living arrangement.
If you’re falling behind or struggling to make your mortgage payment, please contact your mortgage servicer. They can work through your situation and help you out. To figure out what actions you need to take to achieve financial stability, check out our advice on how to be successful in your modification.
If you would like to find out more about your refinancing options, you can create a Rocket Mortgage® account or speak to a Home Loan Expert by calling (800) 758-4788. We can work through this with you.
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