If you're struggling to stay current on your mortgage payments, you may be able to renegotiate the terms of your loan.
Default and delinquency rates are rising nationwide as the economy continues to decline. Foreclosure proceedings are expensive, however, so banks are trying to avoid them by offering to modify delinquent loans, according to the most recent Mortgage Metrics
from the federal Office of Thrift Supervision.
Mortgage modifications formerly were reserved for homeowners who were already behind on their payments. Now, however, lenders are willing to offer them to homeowners who are still current and who meet certain conditions. In particular,
Bank of America
have been willing to undertake preemptive modifications.
Here's what you need to know to talk to your lender about renegotiating your mortgage.
Your lender will base its decision on your request for a loan modification based largely on your debt-to-income ratio, or DTI. Your DTI is a measure of how much of your pretax income is taken up by your housing costs. Typically, the industry uses a DTI of 33% to qualify homeowners for a mortgage. If your DTI is significantly above that figure, your lender may be willing to make some changes on your loan. Ultimately, loan modifications are aimed at getting the DTI to roughly 38%.
If you think your DTI qualifies you for a loan modification, call your lender and ask for the loss-mitigation department. Explain why you are struggling to stay current -- there's no sense in understating or overstating your situation. Typically, the loss-mitigation department will ask you to reiterate this information in a letter of hardship, and they'll ask you to send the necessary financial documents to corroborate your story.
Document all conversations with your lender, including the name of the individual you speak to, the content of the conversation and the time of the call. If you speak to someone who is particularly helpful, ask for his or her extension in case you need additional information later.
If your lender decides that you qualify, there are a few ways it can modify your loan. It can, for example, lower your rate to current levels as reported by
. Your principal is re-amortized at the new rate, meaning the amount you owe on your old mortgage gets rolled over into a new loan and paid off at the new rate. That may bring your monthly payments back in line with the target DTI of 38%.
If your DTI is still too high, your lender can lower your rate even further -- down to as little as 3% -- and then schedule specific rate increases over the next few years. These increases, or rate steps, will eventually bring your rate back up to the rate that was current when you signed your modification agreement.
Alternately, your lender can change the duration or principal of your loan in order to lower your DTI. Extending your loan's term from 30 to 40 years, for example, can reduce your monthly payments. Or your lender may suggest principal forbearance, in which case it sets aside a portion of your loan principal interest-free, to be paid back in full when you refinance or sell your home.
Say you owe $200,000 on your home. Your lender can choose to set aside $50,000 of that principal, leaving you to make monthly principal and interest payments on $150,000. When you sell your home or refinance your loan, that $50,000 is added back on to your loan.
If your circumstances qualify, a loan modification can help you keep your home, and keep your lender from becoming a property owner. Remember, however, that lenders may refuse to modify a loan if they think you aren't struggling enough. And, grim as it sounds, they may also refuse to modify your loan if they think you're struggling too much and they stand a better chance of minimizing their losses in bankruptcy court.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.