When a homeowner is unable to meet the financial obligations of his mortgage, the lender can assert its rights to the property by foreclosing on the home. The lender recovers the value of the mortgage by selling the home. However, to stop foreclosure before it even happens you can get a handle on your finances by reducing your mortgage obligations.
First and Second Mortgages
When a home is foreclosed upon, the lenders are repaid in order of seniority. The original loan used to purchase a home is called the first mortgage. A home equity loan is considered a second mortgage. If other loans are taken out against the home they will fall in line as well. Once a home is sold at foreclosure, the primary lender is paid first. Any remaining equity goes toward repaying the other lenders. If there is not enough equity for the other lenders to recoup the value of their loans, they must go unpaid. Therefore, it usually is not in the best interest of these lenders to initiate the foreclosure process. This is important if your are making payments to multiple lenders. The primary lender should take precedence, and you should therefore consider suspending payments to secondary lenders in order to reduce your mortgage payments. However, this will negatively impact your credit and should be the last option.
A forbearance is another method to lower your mortgage. A forbearance is a short-term solution for borrowers that are behind in their payments. The lender and borrower reach an agreement to allocate a time to respectively delay foreclosure proceedings and get current on payments.
A mortgage modification can lower your mortgage obligations by changing your loan type from an adjustable rate to a fixed rate, extending the mortgage terms, reducing the interest rate temporarily or permanently and adding any overdue amounts to the remaining principal, which is then reamortized over the new term.
There are four government programs available to help homeowners avoid foreclosure and stay in their homes. The Home Affordable Modification Program (HAMP) can lower monthly payments to 31 percent of your monthly gross income. The Principal Reduction Alternative (PRA) works with lenders to reduce the remaining principal. Second Lien Modification Program (2MP) could allow a homeowner to modify or reduce the principal of a second mortgage. Lastly, the Home Affordable Refinance Program (HARP) is for homeowners whose home value has declined and who have been unable to refinance. There are specific eligibility criteria for each and not all lenders participate in these programs.
Based in Washington, D.C., Jeremy Watson is an engineer and urban planner. He has been involved with urban design, city infrastructure and business since 2008. Watson holds a Bachelor of Science in civil engineering from the University Florida, as well as a Master of Science in urban and regional planning from Virginia Tech.