A Fresh Start on Your Home If You’re Behind on Your Mortgage
Jan. 15, 2016
If you are behind on your home mortgage & want to keep your home, do a mortgage modification, a forbearance agreement, or a Chapter 13 plan.
The Three Options
Here’s a summary of 3 ways to get a fresh start on your mortgage:
A mortgage modification is a permanent restructuring of one or more of the terms of the mortgage to make it more affordable. This usually involves a reduced interest rate, the conversion of a variable interest rate to a fixed one, an extended payback period (often to 40 years), or a deferral of paying part of the principal. An actual write-off of any of the principal is very rare. A number of governmental and in-house lender programs may be available. The process can be complicated and eligibility requirements are quite rigid. The reason is that they are intended for homeowners who neither make too much nor too little—who definitely need the help but also stand a decent chance of successfully meeting the terms of the modification.
With a forbearance agreement the terms of the mortgage don’t change but the lender agrees not to foreclose as long as you catch up the mortgage through a schedule of extra payments. Payment of the arrearage—the amount you are behind—is spread out over a certain number of months. The number of months you are given to catch up varies with each lender and with your circumstances, and tends to range from 3 to 12 months.
A Chapter 13 payment plan also doesn’t change the terms of your first mortgage but gives you much more time to catch up—usually as much as 3 to 5 years. You also are given some flexibility about paying certain other important creditors ahead of or along with the mortgage arrearage. You may be able to “strip” a second (or third) mortgage from your home’s title so that you don’t have to pay any or most of that mortgage. That can get you closer to building equity in your home. You also have certain advantages in dealing with other liens on your home, such as those from property and income taxes, child or spousal support, a home repair contractor, or a homeowner’s association.
When to Use Each Option
A mortgage modification is appropriate if you currently can’t afford your mortgage payment and don’t expect to be able to in the near future. Your income and other circumstances must show that you can’t afford the current mortgage but could afford the modified one, based on criteria that may or may not be realist in your circumstances.
A forbearance agreement is appropriate if you’ve missed some of your mortgage payments, and can now afford to make both the regular monthly payment and a temporary catch up one to bring the debt current quite quickly. This is often used in conjunction with a Chapter 7 “straight bankruptcy” case, using the “discharge” (write-off) of other debts as the means to free up monthly cash flow for the catch-up payments.
Chapter 13 is the appropriate option in two main circumstances. First, if you don’t qualify for a mortgage modification but also can’t catch up the mortgage arrearage fast enough to satisfy your lender, Chapter 13 can be the best fallback alternative since it gives you much more time to catch up. Second, Chapter 13 may be the best choice because of the other advantages it provides, either with other liens against the home (such as stripping a second mortgage) or with debts unrelated to the home, such as income taxes or marital obligations.
We’ll look more closely at these three ways of getting a fresh financial start on your home mortgage in our next three blog posts.