If you're going through a personal financial crisis, you can shrink your monthly mortgage payment by persuading your lender to reduce your loan's principal balance. Fortunately, if you are paying off a mortgage loan owned or guaranteed by Fannie Mae, your mortgage lender might have a financial incentive to reduce your loan. That's because the government's Home Affordable Modification Program, better known as HAMP, provides lenders with a financial payout every time they reduce the mortgage payments of a struggling homeowner.
Call your mortgage lender and explain that you can no longer afford your monthly payments and that you need a reduction in your principal balance. Ask your lender if it is participating in HAMP. Even if your lender is not participating in the program, it might still decide to work with you to reduce your loan's balance. Lenders don't want their borrowers to default. Taking over a home through foreclosure and then selling it is a time-consuming and often costly process for banks and lenders.
Make sure you meet the requirements of HAMP if your lender is participating in it. To take part in HAMP, you'll need to be paying off a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, and you must have taken out this loan on or before Jan. 1, 2009. You must owe no more than $729,750 on a primary residence or single-unit rental property. You must be enduring a financial hardship and either be behind in your mortgage payments or in danger of falling behind. You must also be able to prove that you have enough income to pay a new, modified monthly loan payment.
Write a financial hardship letter that explains why you can no longer make your monthly loan payments. Maybe your spouse lost a job, reducing your monthly household income. Maybe you sustained a serious injury that has kept you from working and saddled you with high medical bills. Or, maybe your employer has cut your working hours in half.
Copy the financial papers that document your gross monthly income. This includes your most recent paycheck stubs, income-tax returns and bank statements. Send these documents and your hardship letter to your lender.
Sign any paperwork that your lender requires if it agrees to reduce the principal balance of your mortgage loan. Make sure that you know exactly when you should begin making your lower monthly mortgage payments.
Your lender might suggest alternatives to reducing your mortgage balance. It might instead offer to lower your interest rate. It might also offer to rework your loan's terms, perhaps extending your 15-year fixed-rate mortgage into a 30-year fixed-rate mortgage loan. Both of these steps will also lower your monthly mortgage payments.
When you modify your home loan, you work directly with your mortgage lender. Your lender, then, can impose stipulations in your modification agreement. Some lenders might include a clause stating that if you sell your home too shortly after a modification -- say one to five years -- that you'll have pay a penalty to the lender. Lenders do this because they are taking a loss when they modify the terms of your loan, and want you to remain in your home -- making monthly mortgage payments -- long enough to help them recover at least some of this loss.