My Mortgage Payment Just Increased...What Happened And What Can I Do?
There has been so much attention in the media lately about the subprime mortgage meltdown and what that means to borrowers with some credit issues who want to buy a home in today's market. But the flip side of that coin are the borrowers who have bought a home in recent years when it was incredibly easy to quality for a mortgage and they borrowed through an ARM loan.
Your first question may be: What is an ARM loan? Basically, that stands for Adjustable Rate Mortage which simply means that after a predetermined period of time (typically two to three years) the initial rate on your mortgage loan will adjust. This adjustment is almost always an increase in the rate and the increase can be quite dramatic which will, in turn, significantly increase your monthly mortgage payment.
You may now be wondering why someone would finance under such terms and the answers are varied. It may have been that the borrower wanted to take advantage of the lower initial rate and planned on refinancing the loan before the higher rate became effective. However, another common reason is that when the home owner bought the home, they did have some credit issues that affected their credit and it was necessary to utilitize this type of loan program in order to qualify for the loan the purchase the house. Simply put, a fixed loan was not an alternative at the time of financing, but an ARM was so this provided a solution allowing the family to purchase the home. Most of the time, when purchasing under these terms, the plan is to improve your credit score over the next two years so that before the new rate is in effect, refinance is possible with hopefully a similar rate to the beginner rate on the ARM.
The harsh reality is that most of the families who purchased homes under this situation have some sort of ongoig problem which prevents them from actually cleaning up their credit during the ensuing two to three years so that when the rate adjusts, not only do they not have the means to make the higher payment but they also aren't able to refinance the home, particularly in the market right now with so many of the subprime lenders closing their doors and the more traditional lending programs tightening their standards. And to make matters worst, many of these borrowers also didn't have a significant down payment and many qualified for 100% financing with their closing costs rolled in. So, with only two to three years of appreciation, there isn't enough room in the house to even sell it and break even.
This is one of the many varied reasons we are seeing so many foreclosures today. That is the bad news.
The good news is that there is something you can do about it. So, if you are in this situation, take heart. There are steps that you can take to salvage your credit and your finances.
If you are still in good standing with your loan, but you sense trouble coming. In other words, you know that you aren't going to be able to sustain making the higher payments, start shopping around with some lenders for a refinance loan. It is more difficult, but not impossible to get a refinance. There are many lenders who understand what is happening in the market and they are working on some great programs to help lenders just like you. There have also been some positive changes in FHA lending and some more changes coming. So, make some calls and find out options are available for you.
If have fallen behind on your payments but you have the ability to start making your regular monthly payment plus a little extra, you can call your current mortgage payment and request to be enrolled in a reinstatement program. Your mortgage company can typically take the payments that you are in default for and spread them out over a 12-18 month time frame and add that amount to your current payment. This option works best for someone who had a temporary situation which kept them from making their payments. Or for someone who has had the good fortune of having an increase in income after the loan became delinquent.
Another option that you can explore with your mortgage company is requesting a loan modification. This could involve reducing or modifying the interest rate on your mortgage to a fixed rate mortgage, extending the loan term, or another option which would allow you to make your payment affordable or bring your loan current and get it out of default.
Unfortunately, there are going to be people who won't qualify for any of the these options and who will be facing an impending foreclosure. Even in this situation, all is not lost. It is possible that your home would qualify for what is referred to as a "short sale". This simply means that your home is sold for less than the payoff amount of your mortgage (or mortgages if you have more than one mortgage on your home and can even include judgements if you have some sort of judgement attached to your home) by agreement of the mortgage holder and any lein holder on the property. In other words, the mortgage company would rather settle for a lesser amount than what you owe if will net them enough money so that it is worth it to them to not have to go through the full foreclosure process and then have to resell the home themselves as an REO home. This is a delicate process and can be time consuming, but the benefit is that you may not have as hard a hit on your credit score, and you may be able to avoid the additional fees that you would face in a deficiency judgement if the home goes through foreclosure.
If you are thinking that short sale is a road you need to further explore, then check out our next blog later this week as we will be covering short sales in full, including what a good short sale candidate looks like, what steps you need to take to go through a short sale, and what documentation you need.