Mortgage  Question?
Options if You Cannot Afford Loan Modification

We were in foreclosure and agreed to a loan modification. We made the monthly payment on the modification even though we could not afford them. Now the lender wants us to continue making the same payments. What can we do?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

It sounds like you have been caught in the same foreclosure spiral as many borrowers over the course of the past decade. What is unique and somewhat alarming about your situation is that your lender agreed to accept monthly payments you could not afford. Lenders typically apply a debt-to-income ratio of 43% - 50% to determine the mortgage payment you can afford.  Your debt-to-income ratio is the maximum amount of your monthly gross income you can spending on debt expenses such as your mortgage payment, property tax, homeowners insurance as well as other debt such as credit card, auto and student loans.  Paying that much of your income toward your mortgage payment is not affordable or sustainable in the long run. In short, you have two options to address your situation. As outlined below, you have several options to address your situation.

You first step should be to contact your lender and ask to speak with a loan counselor. Ask about the specific loan modification program they are offering you and understand if it is the Flex Modification Program.  The goal of the Flex Modification Program is to reduce your monthly mortgage payment by at least 20% so that your total monthly housing expense (mortgage payment plus property tax and homeowners insurance) is no more than 40% of your monthly gross income.

In your case, depending on how much your property taxes are the program could enable you to lower your mortgage payment (excluding taxes and insurance) to 31% of your monthly gross income. With the Flex Modification Program there may be a trial period where the borrower attempts to make a reduced mortgage payment based on the program's formula and then the lender may further reduce the mortgage payment following the trial period if the borrower cannot afford the trial payment. We provide a summary of the Flex Modification Program on FREEandCLEAR including how to find additional information.

Additionally, with a direct line of communication to your lender and a better understanding of the details of the loan modification program you are better positioned to achieve a solution that works for both you and your lender.  The more information you provide to your lender about your financial situation and challenges the more likely it is that they can develop a solution that meets your needs.

If contacting a loan counselor with your lender does not answer your questions or meet your needs, our best recommendation is that you contact the federal government's Making Home Affordable program or by calling 888-995-4673 . This program offers advice and counseling to borrowers who are struggling to stay in their homes and can help you determine the best way to handle your mortgage. I have provided the web site and phone number for the Making Home Affordable program below.

One possible financial option is to negotiate a reduced settlement amount with your lender that includes your current loan balance as well as any late fees and penalties. Basically, determine if the lender is willing to take a lower amount than you owe them to pay off your mortgage in full. If they are willing to accept a reduced payoff amount, your next step is to approach a private money lender and see if you can qualify for a loan to pay off your mortgage.

It is basically impossible to get a loan from a traditional lender while you are in foreclosure so a private money lender is likely your only option. The plan would be to use the private money loan to payoff your lender and then refinance that loan with a standard mortgage in two-to-three years after your credit profile has improved. Make sure that you can afford the monthly payment for the private money loan for at least two-to-three years. Based on your income, the payment needs to be significantly lower than the payment you are currently making.  Private money loans require you to pay a higher interest rate so your loan balance needs to be significantly lower for you to afford the payment.

We provide a comprehensive overview of private money mortgages as well as Six Things You Should Know About a Private Money Mortgage on FREEandCLEAR. If you apply for a loan with a private money lender be sure to fully understand the higher interest rate, costs and fees, including any pre-payment penalty, charged by the lender. You can use our FREEandCLEAR Lender Directory to search for private money lenders in your state.

Finally, if you believe that your lender acted in bad faith or in a predatory manner, I recommend that you contact a real estate attorney to review your legal rights. You can also contact your state attorney general or the Consumer Finance Protection Bureau (CFPB) to review your situation more closely.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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