Part Two of MLSA’s Foreclosure Series: Your Options: Keeping Your Home

By Beth Hayes, Staff Attorney, Montana Legal ServicesThe first thing to consider is whether or not you want to keep your home, and whether you are realistically able to do so. If you want to keep your home, and are realistically able to do so, there are many retention options available to you:

  • Forbearance: Forbearance is when your regular monthly payments are temporarily reduced or suspended. At the end of the forbearance, the borrower must bring the delinquency current through a lump sum payment or a long-term repayment plan. Forbearance is the best option for a homeowner when the financial hardship causing the default is specific and temporary. The forbearance period will usually be 12 months or less, and lender/servicer can require escrow payments to be made during forbearance.
  • Repayment: A repayment plan involves curing a default by making an additional monthly payment in addition to the regular monthly mortgage payment until the loan is current.
  • Refinance: Refinance is when a homeowner gets a new loan originated with more favorable loan terms in an amount adequate to pay off the total debt, including any delinquency. Conventional refinance may be an option if the borrower has substantial equity in the property, or the interest rate on the existing note is significantly higher than the prevailing market rates, and the proceeds from the new loan, together with cash resources from the borrower are adequate to pay off the arrearage.
  • Modification: A loan modification permanently changes the one or more of the original terms of the loan. The intent of a modification is to eliminate the delinquency and reduce monthly payments for homeowners who have recovered from the financial hardship but whose overall net income has decreased. Generally, loan modifications can include:
    • Reduction of the interest rate. The interest rate can be reduced temporarily or permanently. The most common situation for an interest rate reduction is when the interest rate on the loan is above the current market rate.
    • Extension of the loan payment period. This option allows homeowners to repay the principal over a longer term, which reduces the monthly payment.
    • Reamortization with capitalization of arrears.With capitalization, the missed payments are added to the principal and spread over the remaining balance of the loan, which cancels the arrears. The loan is then reamortized, which means payments are recalculated using the existing interest rate and new principal balance.
    • Reduction in principal balance. This option may be available if the amount of the loan is more than the value of the property due to depreciation for reasons beyond the borrower’s control.
  • Home Affordable Modification Program (HAMP):Home Affordable Modification Program (HAMP): HAMP is a specific loan modification program created by the Obama Administration in 2009.
    • Borrower eligibility is based on meeting specific criteria including:
      • borrower is delinquent on their mortgage or faces imminent risk of default;
      • property is occupied as borrower’s primary residence ; and
      • mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.
    • After determining a borrower’s eligibility, a lender/servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:
      • First, reduce the interest rate to as low as 2%,
      • Next, if necessary, extend the loan term to 40 years,
      • Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.
    • More information available at: https://www.hmpadmin.com/portal/programs/hamp.jsp
  • For further advice and assistance, contact a HUD Certified Foreclosure Housing Counselor.

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