One of the best ways to avoid facing foreclosure is ensuring that you are able to afford your home when you buy it. One way to do this, is to ensure that you obtain the lowest mortgage rate you can. Here are some questions you need to ask. Additionally, if you are having a hard time paying your mortgage and are facing foreclosure, you’ll want to understand and consider all the options available to keep you in your home.
Obtaining Lower Mortgage Rates
If you’re in the process of purchasing a home and are shopping around for mortgage loans, there are some questions you’ll want to answer.
Fixed or Adjustable Rate Mortgage?
Fixed and adjustable rates are two options you will have for mortgages.
Fixed-rate mortgages have a consistent interest rate that you’ll pay over the life of the loan. The portion of the mortgage payment that goes toward principal plus interest will stay constant throughout the loan term. It’s important to realize that insurance, property taxes, and other costs may fluctuate during the loan term.
Adjustable-rate mortgage (ARM) have interest rates that fluctuate over the life of the loan. Most ARMs begin with an introductory period of 10, seven, five or even one year, during which an interest rate holds steady. Following that introductory period, the rate will change based on an interest rate index that is dictated by the mortgage loan holder.
You’ll want to have a good understanding of what the differences between these two mortgages will mean for you.
Pay for Points?
A “point” is an upfront fee that is 1% of the total mortgage amount. The point is paid to lower the ongoing interest rate by a fixed amount. This amount is usually 0.125%.
Paying a point makes the most sense for homeowners that plan to keep a loan for a long time, but the upfront costs often outweigh interest rate savings over time.
There are also “negative points” where a lender reduces its fees in exchange for a higher ongoing interest rate. There is thus additional interest that will need to be paid over the life of the loan – and they can be significant.
What are Typical Closing Costs?
Closing costs are made up of a variety of fees, including lenders fees, underwriting and processing charges, title insurance fees and appraisal costs. They typically add up to about 3% of the purchase price of the home and are called “closing costs” because they are paid at the time you close, or finalize, the purchase of a house. You’re able to shop around for lower fees, and sometimes finding a lower closing cost fee is a great way to save money on a mortgage.
How Much Can and Should You Put Down?
Typically a lower down payment leads will mean a higher interest rate and thus paying more over the term of the loan. So if you are able to put 20% as a down payment, you should. In our economy, this amount is often very difficult to pay, so it’s important to know that many lenders will accept down payments as low as 5% of the purchase price.
You will want to understand what a lower down payment amount will mean for the overall term of your loan and overall cost. You want to put down as much as you can without completely stressing out your financial situation.
Unable to Make Mortgage Payments
If you have found yourself unable to make the payments on your mortgage and are facing foreclosure, you’ll want to research options that are available to help you.
Consider Loan Modification
If you are struggling to pay your mortgage, the first thing you’ll want to consider is a loan modification. A loan modification permanently restructures your mortgage in order to make it a payment that you ca actually afford paying. With a loan modification, a lender changes one or more of the terms of your home loan so that the monthly payment becomes affordable for you and your family. Sounds like a great idea, right? Before you move forward, there are some basics about the process you’ll want and need to know to move forward.
Because the process can be confusing, and there are a lot of specifics that you might not be aware of, you might consider working with an attorney. A lawyer can also help you decide if a loan modification can help you if you’re facing foreclosure, or if there is another option that you can pursue. In these cases, working with a lawyer might mean the difference between losing your home or being able to finally afford it through a loan modification.
You should also know that you can do a loan modification on your own, you do not need a lawyer to represent you, but make sure you fully and completely understand how the lender is going to modify your loan. Make sure you have a complete understanding of your legal rights should a lender violate the law. You will also need to learn how to spot a loan modification scam. We’ll cover how to spot a scam later on in the post.
Reducing Your Monthly Payment
You will first need to submit an application to your lender for the loan modification. You’ll most likely also need to send some things along with that application. This information is typically bank statements and most recent paystubs that will prove your current income and that the current mortgage payment amount is too high.
Here are some of the things your lender can and might do to reduce your monthly loan payment as part of your loan modification:
- reduce interest rate
- forgive a portion of the principal balance
- convert the mortgage from a variable interest rate to a fixed interest rate
- extend the length of the term of the loan
Qualifying for a Loan Modification
Once you decide to pursue a loan modification, you’ll need to know if you qualify and how it will benefit you. Here are some qualifications that a lender will look for:
You are experiencing hardship. A hardship means something that is unexpected and that has made it difficult for you to afford your mortgage payment. Examples of hardships include: job loss, sudden illness, or death in you immediate family. To prove a hardship, you simply need to write a letter to your lender that outlines the hardship circumstances. You will also need to provide “proof” of how this hardship has impacted your financial standing and why you are suffering financial difficulty in paying your mortgage. This “proof” is often pay stubs and bank statements. The lender will review the letter and the financial information you have provided and determine how they will go about modifying your loan.
You have negative equity. Having negative equity means you owe more on your house than it is worth.
You currently have a sub-prime loan. A sub-prime loan means it is a bad loan, and that it has been deemed that for any number of reasons: it might have been illegally signed (robo-signing was a practice during the housing crisis) or that you were approved for an amount that, based on your financial standing, you never would have been able to repay. A lot of these bad loans were given out during the housing crisis. Many borrowers were offered poor loan products in an effort to sell, sell, sell. These loans have a high rate of default and thus a high right of borrowers who are now seeking foreclosures.
You are facing foreclosure. If you are facing foreclosure (the process during which a homeowner’s rights to a property are forfeited because of failure to pay the mortgage) you can request a loan modification that will keep you from being foreclosed on. You will need to explain to the lender how the modification will help you. Remember that because lenders do not want you to foreclose (they lose money on foreclosures as well), often times they will work out an arrangement to help you stay in your home, which often means offering a loan modification.
Note for facing foreclosure: If you have not been able to pay your monthly mortgage payment and are facing foreclosure you do not have to consign yourself to having to leave your home. You might qualify for a loan modification. Working with an an attorney to list out your options might help you avoid foreclosure, and even obtain a loan modification.
Understanding Your Loan Modification Odds
In 2010, fewer than half of all loan modifications were successfully completed. But knowing what your odds are going in to the process will eliminate any unpleasant surprises. These tricks can help you maximize your chances of navigating the loan modification process successfully.
The Home Affordable Modification Program (HAMP) is a voluntary program in which only Fannie Mae and Freddie Mac lenders are required to participate. Other lenders are able to participate if they want to, which means that lenders outside of Fannie Mae and Freddie Mac are able to create their own modification strategies and rules. This can make it difficult for mortgage lenders to update their procedures and thus train their employees accordingly. This can mean madness for a borrower trying to get a loan modification.
Homeowners seeking HAMP modifications often report constant miscommunication as well as loss of documents on behalf of HAMP.
Here are some tips to mitigate any issues you might run in to:
- Keep a file of everything you send to HAMP
- Update and organize your file on a weekly basis.
- Weekly, call the lender in order to check in on the status of your loan modification.
- Make sure you pay your trial payments on time, every time.
- Know the guidelines. You cannot assume that your lender’s employees will know all the latest guidelines, so make sure you know your facts. It’s not uncommon for applicants to receive different interpretations of the exact same rules from different employees within the same company.
If Denied – Reapply: HAMP guidelines do not include provisions for an appeal process, but you can reapply after a denial if your circumstances have changed.
The process can be rigorous, but a mortgage loan modification can be worth the hassle if it saves you money and keeps you from foreclosure.
Working With an Attorney
At RHM LAW LLP, we will help you explore all of the debt relief options available to you. We are committed to helping our clients resolve their debt problems, achieving true debt relief and avoiding potential debt consolidation scams. Contact us for a free consultation.