We recently received a question from a reader that we researched and wanted to share our answer on the blog. We think it’s good information for anyone who has been turned down for a home loan modification.
Q: If I’m turned down for a home modification, can the bank take my home (because my credit score is now lower and my debt is higher than when I bought my home) even if I’m making my payments?
A: As long as you’re current on your mortgage payments, the lender can’t foreclose on your home, even if your credit score has dropped and your loan is “upside down.” (An upside down loan means that your mortgage loan is higher than the value of your property.)
Why modifications are denied
There’s a high re-default rate on loan modifications and your modification might be denied if you make too much money, your mortgage has not defaulted enough, or if you’re currently out of work. The government now requires banks to tell you why your loan modification was not approved.
When a bank can foreclose on a property
Whether (and when) your lender can foreclose on your home depends on your state’s laws and whether you’re behind on your payments. In some states, foreclosure proceedings can begin after the first late payment. But, it’s more common that the process starts after three months of missed payments.
Foreclosure won’t take you by surprise. Before your home is foreclosed, you’ll receive a Notice of Default from your bank. After you get this notice, you generally have about three months to bring your loan current before your lender sends the Notice of Sale. After this notice, your home is auctioned off and the deed is given to the higher bidder.
If you’re already behind on your payments and the loan modification falls through, you have some other options:
The lender may put you on a repayment plan that allows you to catch up on your defaulted payments. For this to work, you need to be able to pay your regular mortgage payment and the catch-up amount. For example, if you’re behind $2,400, your lender may let you add $200 to your mortgage payment for 12 months to catch up.
Refinancing is an option. When you refinance your loan, your missed payments are added back into the loan and your payments are recalculated. Unfortunately, you may have a hard time convincing your lender to refinance your loan if your credit score has dropped.
Declaring bankruptcy to avoid foreclosure
Finally, you may be able to use Chapter 13 bankruptcy to keep your home. Filing bankruptcy would stop the foreclosure process and require the lender to work out a five-year repayment plan that would allow you to catch up on your defaulted payments. You would still responsible for making your normal mortgage payments.
Of course no one wants to lose their home, but you may have to walk away from it if the situation gets worse. You can sell your home and use the proceeds to pay off your mortgage. Your lender might allow temporarily stop or reduce your payments while your home is on the market. Since your mortgage is higher than your home’s value, you might have to do a short sale in which the lender agrees to forgive the debt and accept the lower payment.
Dealing with and avoiding foreclosure can be difficult. It’s good to be proactive and do things like apply for a loan modification to avoid the foreclosure process.