Loan Modification Programs for Underwater Mortgage

If you don’t qualify for any loan modification programs and have an underwater mortgage, you might not want to walk away but instead consider a short sale.

Q: I have been forced into retirement as I can’t find a job with my skills inventory. That means I have to live on a fixed income of about $2,400 per month and my monthly mortgage payment is about $1,650.

To make matters worse, my house is underwater. I believe my home is worth about $225,000 and I owe about $250,000. My bank thinks that my home is worth $340,000, due to their peculiar commercial tools they use to establish changes in market value. I refinanced my loan back in 2009 and missed cut offs to get assistance under the HARP program.

I live in Georgia and tried to apply for the Homesafe Georgia Program but the folks that run that program said I may not qualify because of my Social Security status and a pension payment I receive. I applied two months ago and have not heard back from them.

Other than walking away from the house, are there any programs that I may qualify for that will result in a mortgage loan modification? I have contacted my lender but am not getting any response.

A: It’s good to know that there are some states that have other programs that might assist homeowners going through troubled times with their home lenders.

The Homesafe Georgia Program is a short term solution to assist homeowners during tough times while they are unemployed or underemployed. There are a number of other qualification items and among them; you can’t have more than $5,000 in liquid assets.

If you are retired and not looking for work, your employment status won’t change and the Georgia program was designed to help people that have short term financial issues. Your situation appears to be permanent and a short term loan or other short term assistance will not help you in the long term. That’s why you might not qualify for the program.

You refinanced just a couple of years ago and you probably have a pretty good interest rate on your loan. Another refinancing now won’t help you much. If your monthly mortgage payment is $1,650 and that includes your real estate taxes and insurance payments, lowering the payment by $100 or $200 won’t do you too much good.

You are paying about 66 percent of your monthly gross income towards most of your housing expenses. That amount doesn’t leave you much to live on. And, if the amount you claim is only the amount to pay the loan and you also have to pay real estate taxes and insurance above that amount, you really don’t have much money to live on each month.

While you may want to keep the home, even if your lender lowered the amount you owe them by $50,000, your monthly housing payment might be too high relative to the amount of fixed income you receive each month.

This would be a good time to reassess whether you might be better off moving from your home and finding alternate housing that would suit your long term financial abilities. The question you asked was whether there are government assistance programs out there that could help you out. The short answer is that there do not appear to be many programs that can assist most homeowners that are underwater with their homes.

Newer programs to assist homeowners that are underwater assume that those homeowners have the income necessary to refinance their loans irrespective of their homes’ values. This type of program wouldn’t be of much use to you. In reality, the only program that could help you is one that wiped out much of the loan you owe the bank or eliminated any interest payments to the bank. You won’t see any of those programs now or in the future.

Consider this, if the lender reduced your loan to $200,000 and charged you only 2 percent on your loan, your monthly payment, without insurance or real estate tax amounts, would still be about $740 per month. When you add taxes and insurance to that payment, you would still pay close to half of your monthly income towards your housing expenses. These expenses wouldn’t even include maintenance issues and the routine monthly expenses of keeping a $250,000 home. It seems that you might have to consider other options at this time, other than trying to stay in the home.

We don’t think that you should just walk away from the home. Your better option might be to try to list your home for sale and sell it as a short sale. That is a sale in which the proceeds of the sale will not be sufficient to pay off all of the expenses of the sale and the lender’s mortgage. Although Georgia is one of those states that might preclude your lender from going after you for a deficiency judgment, you might still be better off trying to sell the home in a short sale.

When you market the home through a real estate broker, you have a better chance of maximizing the amount of money that might come in to purchase the home. A short sale will look slightly better on your credit history and credit score over a foreclosure. You can give the sale a chance and if that does not work quickly or your lender isn’t willing to approve the short sale, then you can consider asking the lender to take the property in lieu of foreclosure or walking away.

However, before walking away, we’d truly suggest that you talk to a real estate attorney in your area to go over the consequences of that option and to discuss what other options might be available to you. It’s possible that an attorney looking over your situation might see other options that could work for you that you haven’t disclosed in your letter. Good luck and please let us know how things work out.


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