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We recently filed for bankruptcy. What modification options do we have for our mortgage loan?

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Posted On: 03/19/2008

Q: My husband and I recently filed for personal bankruptcy, however we did not include our house. Now we’re having a difficult time keeping up with the mortgage payments and are behind 30 days. I have contacted our mortgage holder, and we’re trying to work out temporary financial arrangements for a few months until our income is back on track. What are my options with them, or is it better to put it up for sale and get out all together?

A: As you are now in bankruptcy you should first contact your attorney to see if any protections are available to you through the court system.

As to what lenders can do in your situation, the answer generally works like this: You are most likely in contact not with your lender but with a “servicer” who collects money for the owner of your mortgage. The ability of your servicer to assist you depends largely on the terms of the “pooling and serving agreement” for your particular loan. In some cases the servicer will not be able to make any loan modifications, in other cases a range of options may be available.

Let’s say your servicer can help. In that case, there are several common options to discuss:

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• Forbearance: You may be allowed to make smaller payments for a few months or even skip a payment. The money not paid is added to the mortgage debt.

• Rate reduction: If your financial problem is short-term, a temporary rate reduction – say three months to three years – can be a big help.

• Re-payment plan: If you miss a payment, you make it up over time by making larger payments in the future. Example: You miss a $1,200 payment. For the next year you pay $1,300 a month.

• Temporary indulgence: A fancy term that simply means that you bring you mortgage current and the lender does not foreclose. However, your credit will usually reflect the missed payments.

•Re-amortization: If you missed a payment, the lender will add the unpaid amount to the loan balance. The result is somewhat higher monthly payments for the remainder of the loan term.

• FHA: The FHA has an exceptional foreclosure prevention program. If you have an FHA-insured loan call 1.800.569.4287 or 1.800.877.8339 (TDD) for assistance. “In fiscal year 2007,” says FHA Commissioner Brian Montgomery, the “FHA provided loss mitigation support to 91,000 borrowers, 86,500 of whom then cured their defaults and stayed in their homes.”

• VA: If you have a VA loan, look into “re-funding.” These are situations where the VA buys back the loan to prevent foreclosure. For details, contact your nearest VA office or call 1.800.827.1000.

• Military Service: Under the Servicemembers Civil Relief Act of 2003 you generally cannot be foreclosed when on active duty and for 90 days afterward. Also, your interest rate cannot exceed 6 percent. See your base housing or JAG officer for details.

• Deed in lieu of foreclosure: Here you give back the keys to the lender. The catch? The home must be free of other debt and the lender may want a note for the unpaid mortgage balance.

• Short Sale: In this situation the lender allows you to sell the property for less than the remaining mortgage debt to settle the loan. The downside? You may owe the lender any unpaid debt (the “deficiency”).

Borrowers seeking to modify loans are best served by NOT contacting their lender or servicer. Instead, have a real estate attorney do the calling on your behalf. Modification agreements can be complex because there are substantial cash and credit issues to consider. This is not a do-it-yourself project.

In addition to working with lenders, there are other strategies to consider.

First, sell the house. This is particularly attractive in situations where there are no late or missed payments, therefore your credit standing has not been reduced.

Second, look into HUD’s FHASecure program, but be prepared to be disappointed. Despite HUD’s claims of huge success, this program, which was specifically designed to help delinquent conventional borrowers, aided only a few hundred during the last four months of 2007. The problem? You can have late or missed mortgage payments to qualify, but you’re supposed to otherwise have good credit. Speak with lenders for details and ask how many delinquent borrowers they’ve actually helped with FHASecure.

If you’re facing payment problems because your mortgage is steeply resetting, get out before your credit is ruined and your cash is gone. Look into alternative loans and loan modifications. If such options are unavailable, then sell.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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