Alternatives to Mortgage Loan Modification

Dan rafter
Written by
Dan Rafter
Read Time: 3 minutes

If you've been unable to secure a mortgage loan modification, you may be humming bars from the '65 hit single "Nowhere to Run" by Martha & the Vandellas. But rest assured - modification isn't the end-all solution to mortgage troubles. A permanent mortgage modification may not be available to you, so it's important to know your next best option. You can then settle on an appropriate back-up plan.

Temporary income loss

Forbearance may be the right solution if your financial problems are temporary. In this scenario, your lender agrees not to pursue foreclosure for a set time period. This agreement usually involves reduced payments, if you agree on a plan to catch up on those amounts. The challenge in securing forbearance is proving that your situation is indeed temporary. An example might be a physical injury that keeps you from working regular hours, but has an expected end-date, assuming that you have a doctor's opinion to prove it. In contrast, a small business that's struggling may not be viewed as temporary, because the recovery timeline is indefinite.

Falling home values

When real estate was hot, you may have accepted the risk of stretching your budget. Maybe the mortgage payment was steep initially, but you planned to sell or refinance after a year or so. Falling home values took away these options, and now you're stuck. In this scenario, a short sale or deed-in-lieu of foreclosure may get you out of the bind.

In a short sale, you sell the home for market value, which is less than your mortgage amount, and the lender takes the proceeds. Any remaining balance is written off. A short sale will have a negative impact on your credit score. A deed-in-lieu of foreclosure has similar results, but you don't have to wait for the home to sell. You turn over the title voluntarily, and your lender releases you from further obligation.

Restrictive mortgage payments

You may be in a situation where you can afford your mortgage payments, but just barely. Maybe you're skimping on food and clothes. You've already cancelled your cable, landline, and gym membership. If you can't bear to sell your home, try delaying foreclosure by increasing your income somehow. It's not an ideal way to live, but you could get a second job, or take on a renter. Bide your time until you get a raise at work.

Other debt payments

Chapter 13 bankruptcy may be a solution if your budget is being strangled by credit card or other debt payments. The court will stop the foreclosure process, and then help you reorganize your debt, including any amounts past due on your mortgage.

Sometimes, a combination of factors drives financial troubles. Maybe your payments are too high, you've lost your job, you have medical bills piling up, and you have negative equity. In this scenario, you may have nowhere to run. If your lender won't work with you, accept foreclosure as the best resolution. In the meantime, stash your monthly payment into a savings account designated for moving and future rental expenses.

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