Few words sting like the ones that inform you that you’re being laid off — especially today, with jobs so hard to come by. If you’re a homeowner, the blow of a job loss can be even worse. In households with more than one wage earner, halving the monthly income can severely stretch a budget. And in households where there’s one breadwinner, having zero income can be devastating. A rainy day fund helps, but it’s important to craft a plan early about how you’re going to get through the rough patch. More people are facing this nightmare today: While the volume of subprime mortgages headed to foreclosure is falling, the volume of prime, fixed-rate mortgages defaulting is on the rise, according to statistics from the Mortgage Bankers Association. The MBA’s chief economist said that’s a result of rising unemployment.
“If you don’t have the prescribed three to six months income in the bank (now eight to 12 months due to how long it takes to replace that job), you’re really in deep trouble with some troubling decisions to make,” said Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling, in an e-mail. The NFCC is a national, nonprofit credit-counseling network. “We always advise people to pay their living expenses in full (this includes the house payment), followed by any secured debt (usually the car payment), and then the creditors. This will keep a roof over your head, food on the table, utilities paid, medicine in the cabinet, the kids at day care, etc. Once the money runs out, no one beneath that line gets paid. However, this assumes that there’s either some savings to fall back on or another income source,” she said.
Between programs offered by the government and loan servicers, there are additional options available for today’s homeowners before they slip into foreclosure — if they speak up and ask for help. Or maybe the best answer is to start over again by cutting your losses and selling your home or pursuing a short sale if you owe more on your mortgage than your home is worth, those in the industry say.
Whichever road you choose, it’s important to make contact with the lender or servicer as early as you know you could have a problem on your hands — and before you get behind on your payments. The MBA has a listing of contact information for lenders and servicers, including links to Web sites that give consumers a glimpse of some of the help that is offered.
“A lot of customers call us very late in the process, and it becomes extremely difficult for us to explain everything in one shot and to resolve everything to their satisfaction,” said Sanjiv Das, CEO of CitiMortgage.
Early communication is also stressed at Chase, said Christine Holevas, a bank spokeswoman. Remember also to be open and honest about your financial situation. You may think you’re bettering your chances for help by fudging on income information, for example, but it will in fact slow the process down; when income is verified and is found to be false, you’ll have to start over again, she said.
For help, there are counselors who will sit down with you and sort through options and paperwork. Chase, for example, has counselors at 27 homeownership centers throughout the country to assist its borrowers, Holevas said. The U.S. Department of Housing and Urban Development has a list of approved housing counselors, or homeowners can connect with a counselor through the NFCC site.
The solution that has gotten some of the most press this year has been the government’s Home Affordable Modification Program, which lowers monthly payments for borrowers based on debt-to-income ratios. Borrowers have to successfully complete a three-month trial period before the modification is finalized. Some homeowners are still confused about who is eligible, said Greg Hebner, president of MOS Group, a loss-mitigation service provider that works with lenders and servicers. For one, the program “requires a hardship, but does not require you to be delinquent,” Hebner said. “That is an important consumer misconception—if I’m still making my payments there is no help for me.”
But what the government does require is some amount of monthly income within the household, said Drew Kessler, director of sales for Rand Mortgage, in New City, N.Y. In a dual-income household, for example, if one person loses his or her job, a modification is a possibility. With one breadwinner, it probably isn’t. “There has to be some viable source of income,” Kessler said. “If they lost wages, or found a new job, the banks will work with them.” Kessler’s advice: It might be best to accept a job that pays less instead of holding out for one that is best suited to your salary history in order to qualify for the adjustment.
A borrower also has to be in danger of imminent default to be eligible, Holevas said. “They’re going to take a look at what your liquid assets are,” she said. If a borrower has more than seven months worth of payments in savings, he or she is not yet in imminent danger of falling behind and likely won’t be able to modify, she said. If you do qualify, it’s important to submit complete and accurate information in order for the application to move through the process without hiccups, Holevas added. If you don’t, “the back and forth tends to really slow things down,” she said.
Remember, if you don’t qualify for the government’s program, many mortgage servicers have their own modification plans, Holevas said. All options can be examined if you start early enough. “Contact your lender when you think you’re going to have a problem,” she said, even if you’re a couple of months out from not being able to make your payment.
For some homeowners, however, it might make more sense to sell their home and start fresh. Home sales are up recently in many markets, and if you’re living in a home that would be attractive to a first-time buyer eligible for the government’s first-time buyer tax credit, you might be able to take advantage and make a sale before the credit expires at the end of November, Kessler said.
“Maybe sell now and get yourself in a smaller property, a less costly property,” he said.
For homeowners who owe more on their mortgages than their homes are currently worth, short sales can be a viable option. In a short sale, the home is sold for less than the mortgage amount — with approval from the lender — and the difference is forgiven. Short sales usually take longer than a traditional sale, so borrowers might want to seek out a real-estate agent who is a certified default property expert in order to expedite the process, said Rich Rollins, president of National Quick Sale, a firm that works with the mortgage industry to get short-sale offers processed. His firm also helps match up investors with distressed properties, working out deals that allow the homeowners to give up ownership but rent their home, with the potential for them to “rent to re-own,” he said.
He warns, however, to be careful of unsolicited offers of help from people claiming they can save your home, he said.
“Be very wary of people who approach you for a profit or fee upfront,” Rollins said. “You’ve got to be diligent because there are people out there trying to steal your money,” he said. “You’re already in a precarious position. Don’t let people take advantage and take the money that you do have.”