More banks are not only helping homeowners who are delinquent on their mortgage payments, but those who may only be at risk for foreclosure because of lost jobs, reduced hours or commissions, divorce, a death in the family or military service.
With interest rates falling, some homeowners may think it wise to wait before requesting a loan modification to lower their monthly payments. But HSBC spokeswoman Kate Durham cautions, "It's never appropriate to do nothing. The earlier you take action, the more options you may have."
Most banks are putting a moratorium on foreclosures - especially during the holiday season - for eligible borrowers seeking to stay in their homes, as long as they are working in good faith with the bank.
Many lenders also have hired additional loan counselors so that borrowers can work with the same person throughout the process to improve follow-through and success rates. And some banks are going a step further: For instance, Citi's Office of Home ownership Preservation offers round-the-clock access to loan counselors, and Chase has opened 24 new regional counseling centers.
Here are five ways they and other lenders might be able to help you lower your monthly mortgage payments:
1. Increase your loan terms
One of the most common strategies is to extend the terms of the loan (the amortization period) into a 40-year fixed-rate mortgage. "This reduces the homeowner's monthly payments on the one hand, but creates a balloon payment in 30 to 40 years," says Evan Wagner, media spokesman for IndyMac Federal Bank. "But because many homeowners will have refinanced, sold or passed away in that time, this adjustment helps achieve a lower payment at little risk."
2. Fix those adjustable rates
"In 70 percent of the loan modification cases we handle, we can reduce the borrower's payment to an affordable level simply by reducing the interest rate," says Wagner of IndyMac. Qualified borrowers are being offered a fixed interest rate as low as 3 percent for five years that gradually adjusts back up to a permanent fixed rate of 6 to 6.50 percent. The goal is to get homeowners' monthly income payments to be between 31 and 38 percent of their gross monthly income. Each bank varies in its debt ratio (the percentage of gross monthly income that goes each month for your housing expenses). Chase and Bank of America (now servicing Countrywide Financial Corp.) are seeking to modify interest rates on subprime adjustable rate mortgages. They want to lock in the interest rate to what it was originally for the life of the loan.
3. Ask for 'principal forbearance'
"Principal forbearance" is a fancy way of saying: Keep your home today, but pay for a portion of it later. Chase is one of many banks that is sending mailings to people with mortgages offering modification, says Michael Fusco, Chase spokesman. Here's how it works: The bank carves off a portion of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. However, when you sell or refinance, the bank adds that portion back onto the total amount you must repay. By then, it is hoped that your home value will have increased. Principal forbearance is one way banks try to help make payments affordable.
4. Some will reduce principal
Bank of America is one of many banks that will consider reducing the principal as a modification. Rick Simon, a Bank of America media spokesman, says that, in order to be eligible for such a reduction, a homeowner must have received an Option ARMS mortgage and is likely to be delinquent in the future due to an unaffordable rate reset. The loan-to-value ratio at the time of the modification is 75 percent or higher. In some cases, the mortgage interest rate can be reduced to as low as 2.5 percent and the loan will be converted into either a fixed-rate mortgage or a 10-year interest-only loan.
5. Forgive fees
Citi spokesman Mark Rodgers says many banks will work with distressed borrowers showing goodwill by trying to work out an affordable monthly payment. The bank will waive certain charges related to loan modification - late fees or bank legal fees, for example, to get the person on track with an affordable monthly payment.
6. Modify or finance?
A refinance typically refers to getting a completely different loan with a new lender and paying off your old lender. "Modifications are a better option," says Great Neck attorney Douglas M. Spector, a partner in the firm of Rothkrug Rothkrug & Spector, LLP, whose practice involves real estate. And, he adds, they are more commonly used when borrowers are experiencing a hardship in making payments, have fallen behind and are in danger of losing their homes. "Due to plummeting home values, many borrowers don't have enough equity to qualify for a standard refinance," he says. "Modifications often don't require high credit scores or generate fees, and lower home values can actually be helpful." Spector advises borrowers to retain a lawyer to look at documents before signing anything. But having a lawyer is not required by the bank.
7. What will banks ask for?
Be prepared to be grilled about your finances. HSBC advises homeowners to be prepared and informed before they contact their lender by digging out financial statements such as pay stubs, bank statements, tax returns, and W2s.
Find your monthly bills. This includes mortgage, heating, electric, telephone and other obligations such as gas, food and day care.
Work out a reasonable budget. This will help you determine realistic monthly payments to present to your lender.
Calculate your debt ratio. That's the percentage of your gross monthly income that goes each month for your housing expenses. Every lender has set a figure that is acceptable. Most range from 34 percent to 45 percent.
8. Writing a hardship letter
'The key to a successful loan modification is a convincing hardship letter," says Susan Gregory, author of the self-published e-book "The Complete Loan Modification Guide" ($62). "It paints a picture of your family's current financial position and is your best opportunity to explain the circumstances," she says. Below, tips for a successful letter:
Don't be long-winded. Make it one to two pages.
Describe the hardship and the circumstances that caused it.
Explain steps taken to correct situation.
Provide a plan to get back on track.
Assure the lender that you are a responsible homeowner who just needs a second chance.
Provide documentation of medical bills, layoffs, cut hours, divorce/death certificates, alimony payments, etc.