Suze Orman's Action Plan (20 page)

If the rate reduction doesn’t get you down to the target 31% DTI, the lender can consider extending your loan term to 40 years to lower the monthly cost you pay, and can also consider “principal forbearance” where it stops charging interest on a portion of your loan amount for a set period.

The Home Affordable Modification Program expires at the end of 2012.

ACTION:
Unfortunately this can be an unintended consequence of modifying your loan. Some banks
in 2009 reported modified loans as “not paid in full” or “delinquent,” and that will indeed cause a credit score to drop. Loans that are part of the federal modification program are now supposed to be flagged as modifications—not late or delinquent payments—to the credit bureaus. FICO has no immediate plans to incorporate modifications into its scoring system, but once it compiles more data it may change the way it factors modifications into its scoring algorithms. I think the best approach is to understand that if you do a modification, your credit score may drop—either because your lender reports it erroneously, or because FICO could change its scoring system in the future. If you are sure a modification will allow you to stay in the home, then that can be a worthwhile trade-off.

ACTION:
Rental properties do not qualify for the Making Home Affordable programs. To qualify for a refinance or loan modification, the property must be your principal residence.

ACTION:
Check with your lender. You may still be able to work out a deal using HAMP. While the program is mandatory for loans that are held or securitized by Fannie Mae and Freddie Mac, lenders can choose to use the program for other types of loans as well. In fact, HAMP offers financial incentives for lenders to participate. So don’t give up if you find your mortgage is not held by Fannie or Freddie. Bug your lender as often and as persistently as needed to find out whether they will consider any mortgage workout with you.

ACTION:
See if you can qualify for the Home Affordable Refinance Program. When the program was first launched in the spring of 2009, it was limited to homeowners whose mortgage balance was no more than 105% of the current appraised value of their home. That rule was later extended to 125%. You can now be as much as 25% underwater and still qualify for HARP.

Here’s what it takes to have a shot at the Home Affordable Refinance Program:

• The loan on your property is owned or guaranteed by Fannie Mae or Freddie Mac. (See details above for how to find out.)
  

• At the time you apply, you are current on your mortgage payments. The government’s definition of “current” typically means that during the past year you have not been more than 30 days late.
  

• The amount you owe on your first lien mortgage does not exceed 125% of the current market value of your property.
  

• You have a reasonable ability to pay the new mortgage payments.
  

• The refinance improves the long-term afford-ability or stability of your loan.
  

HARP is currently scheduled to expire on June 10, 2010. You must have the new refinanced mortgage in place by that date. Please check my website for an update on whether this deadline is extended past June 10, 2010.

ACTION:
You may still qualify, but it is up to the lender that owns your second mortgage or HELOC to agree to the refinance. If there is any way you can pay off the second mortgage/HELOC it may help you get your refinance approved.

ACTION:
You may still be able to work out a deal with your lender. Though Home Affordable requires all Fannie and Freddie mortgages to be considered, lenders can choose to use the same programs for other mortgages too. To be honest, not all lenders have been eager to help, but some have. As I said earlier, you can’t wait for someone to call you up and offer assistance. You need to be aggressive in asking for help and pushing your case forward.

ACTION:
If you can’t negotiate a lower payment with your lender and none of the programs mentioned above can help you, then I am so sorry to tell you that you must try to sell your home—and the sooner the better. I know it is excruciatingly painful to consider, but it is also a simple decision. You cannot stay in a home you cannot afford. Remember, the right moves are honest moves.

ACTION:
Do not base your decisions today on the magical hope that somehow everything will work out if you can just wait for the big rebound.

If the only way you can hang on depends on a fast and dramatic rebound, your honest move is to try and sell your home.

ACTION:
Make sure to check in with the lender to see if you can qualify for the Home Affordable Refinance Program (go to
www.makinghomeaffordable.gov
to learn more). If you are turned down and you will not be able to afford the mortgage when your interest rate resets, then I am afraid the best thing to do would be to try to sell your home.

ACTION:
Again, push to see if your mortgage can be modified. If not, you must consider selling, because using your credit card is not a good solution
to this difficult problem. You need to look a few months into the future and realize that before you know it you will have reached your card’s credit limit. Then what? You will have a ton of credit card debt and a mortgage you still can’t afford. All you have done is delay the inevitable, and in the process you have added thousands of dollars in credit card debt.

For those of you who are stubborn and want to use your credit cards to help you stay in your house, I need you to review what I explained in “Action Plan: Credit.” I have never advocated piling on credit card debt, but in the wake of the financial crisis that began in 2008, it is doubly dangerous. As I write this in the fall of 2009, credit card companies are especially wary of anyone who seems to be heading for trouble; a rising unpaid balance will set off warning bells at the credit card company. It can result in your credit limit being cut, your account being shut down (you won’t be able to make new charges, but you will still be responsible for your existing balance), and your interest rate could skyrocket. Please don’t compound your mortgage problem with a credit card problem.

I know this is hard to consider, but if you really can’t afford the mortgage today, it is better to move than to go deeper into debt trying to hold on. Of course, I am assuming you have done absolutely everything possible to come up with the
money to pay the mortgage. In “Action Plan: Spending,” I have suggestions about how to cut your expenses so you have more money left to pay the mortgage or address other financial goals.

ACTION:
Don’t do it. If you use up your retirement money today, what will you live on in retirement?

I see so many people making this huge mistake these days. I understand the thinking: You are desperate to hang on to your house and will do anything not to fall into foreclosure. So you empty out your 401(k), paying income tax on the withdrawal and may also be hit with a 10% penalty for money taken out before you are 59½. But then, six months later, you find yourself back in the same hole: You have used up all the money you withdrew from your 401(k) and you are once again falling behind on your mortgage. So all you have done is delay the inevitable: that you can’t really afford this mortgage. But in the process you have wiped out any retirement savings. For nothing.