Apply For A Loan Mod, Or Walk Away?

3/2/2012

If you have a hard time making your mortgage payment, then you've probably thought about applying for a home loan modification from your lender. Loan mods are hard to get, though, and some homeowners choose to give up their homes to foreclosure.

Homeowners generally want to make good on their home loans, says Dean Wegner, a mortgage specialist in Scottsdale, Ariz., and author of the book "Life After Foreclosure." But, he says, when homeowners have trouble paying, they should consider the pros and cons of all their choices -- including walking away from the mortgage.

The following are some points to consider if you're choosing between asking for a loan modification and letting go of the home.

About mortgage modification

Foreclosure is still possible, even after a loan modification. When a mortgage is modified, the homeowner may receive a lower interest rate, a longer period to pay back the loan, and maybe even some loan forgiveness. But those changes might not be enough, Wegner says. Nearly half of loan modifications end in default.

There is no guarantee that the lender will approve a loan mod. Even if a homeowner can benefit from a change in mortgage terms, it doesn't mean the lender will approve, Wegner says. "A loan modification is very hard to get. You have to submit paperwork (such as proof of income and bank statements), and the approval process typically takes from six to 12 months," he says.

Counselors can help borrowers apply for modifications. Homeowners applying for loan mods should consider seeking counselors from agencies affiliated with the National Foundation for Credit Counseling, or NFCC, says Mary Ellen Nicol, a certified housing counselor with CredAbility, a nonprofit credit counseling organization in Atlanta.

"Counselors can help homeowners understand all of the documents they need to submit to mortgage companies to be considered for a loan modification," she says. "Once we collect these documents, we can send all of them directly to the mortgage company, which reduces the chances that the documents will be lost."

Perils of walking away

Borrowers who don't think they're good candidates for a loan modification may consider walking away from their home and losing it to foreclosure. That choice has consequences, too, Wegner says.

Foreclosure drastically damages credit. A foreclosure affects one's ability to borrow money, open a new credit card account or buy a new home for a long time, Wegner says. "A foreclosure will remain on your credit for seven years," he says.

However, for some borrowers, walking away may give them a chance to move on with their lives, Wegner says, and they eventually can buy again.

"Your credit is impacted, but you may be able to buy another house in as little as three years, with an FHA loan that would only require a 3.5 percent down payment," says Wegner. Borrowers may decide that walking away is a better option than trying to stay in a home whose value has plummeted and might not recover for a decade or more, he says.

Employers may ask about foreclosures. While a foreclosure may stay on a credit record for just seven years, borrowers need to understand that it could affect future employment indefinitely, Wegner says. "On some job applications, especially for banking, insurance and military positions, you may be asked if you've ever had a foreclosure."

Owners may still owe. Lenders in some states can obtain deficiency judgments, meaning lenders can sue to recover the money they lost after the foreclosed homes have been sold.

Other options

Borrowers who are ineligible for loan modifications can consider other options, such as short sales or deeds in lieu of foreclosure. "These are less damaging to your credit score than a full foreclosure, and can give you more ability to borrow in the future," Nicol says.

If you're considering one of these options, check to see if you qualify for the federal Home Affordable Foreclosure Alternatives, or HAFA, program available through 2012. HAFA can help streamline the short sale or deed-in-lieu process, and may even provide borrowers with $3,000 to help with relocation costs.