Mortgage Home Loan Modification Programs When You Can't Afford Your Payments

Q: I became engaged over Christmas. Unfortunately, the big hurdle to combining our households is the sale of my house.

I bought a house in August, 2008 for $170,000. My current payment is $1,365 at an interest rate of 6.5 percent. It is an FHA-backed mortgage held by one of the big lenders, and I have mortgage insurance that I pay each month.

I currently owe $164,000 on my mortgage. The property qualified for the Georgia Dream Homeownership Program for teachers, so I have a $7,000 interest-free second mortgage on the house.

The sales of comparable homes in my area show that the most I can probably get for my house is $159,900. If I were to sell for that price, I would go into debt by about $20,000 on the sale. The mortgage and expenses are so high that I wouldn’t get enough if I rented the property. Plus, I’d have to pay off the $7,000 second mortgage before I could do a lease/purchase or offer the property as a rental.

Do I have any options other than going into major debt?

A: You should contact the FHA and see if you’re eligible for a streamline loan modification (this is like a streamline refinance not a loan modification program under HAMP – the Obama Home Affordable Modification Program) that would lower your interest rate from 6.5 percent to something closer to 5 percent. That’s a special FHA program, and your lender should know about it.

Just an FYI: You may not qualify because your house is worth so much less than your mortgage amount.

While this might help a little, I don’t see an easy way out of this situation for you. Can you and your fiancé live in your house for awhile and lease or sell his house?

If not, then take the easiest way out and pay off the $7,000 loan so you can at least rent out the property. If you don’t have to take a $20,000 to $40,000 hit now, you shouldn’t. It’s better to be $7,000 in the hole than $20,000 or more.

Your final option is to let the property go back to the bank. You would stop making payments on the loans you owe on the home and the lender would move to foreclose the home. Your credit score would plummet but you would have gotten rid of the home.

You should know that in some parts of the country, if the lender feels there is a chance of recovering money from you, they could sue you to recover the amount you still owe on the loan even after they sell off the home. If they pursue a case against you for the deficiency, they would have to obtain a deficiency judgment from the court against you.

In Georgia, lenders are permitted to obtain deficiency judgments against borrowers but they must foreclose on the home and they only have a certain amount of time to go to the court and get the judgment against you.

What you do now is important, and will have long-term ramifications to your financial life, so think it through carefully. You may with to consult with a housing or budget counselor at Credability.org.