In 2005 and 2006, homeowners were urged to take out hybrid mortgages in order to buy more house or reduce payments. Lenders promised that homeowners would be able to refinance into a new mortgage before the rate reset in two, three, or five years. Unfortunately, the declining housing market means that many borrowers find themselves with sharply increased payments and fewer options.
Tools to Avoid Hybrid Mortgage Foreclosure
If you've received notice that your 2/28 mortgage, 3/27 loan, 5/1 ARM, or 3/1 ARM is due to reset, now is the time to act. Review the following tools to avoid foreclosure and then contact your lender to discuss a solution.
Refinance the Mortgage
Despite the mortgage crisis, some homeowners with hybrid mortgages can refinance into new, fixed-rate loans. You must be current in your payments and have a lower loan balance than the current value of your home in order to qualify. If this is you, call your lender now to review refinancing options.
Request Loan Modification
The federal government and several lenders have introduced loan workout or modification programs to help borrowers stay in their homes. The most popular option is the FHA Secure program. You may qualify if you meet the following terms:
- original loan was not an FHA ARM mortgage
- payments prior to the reset were current
- no late payments in the six months prior to the reset
- adequate income to meet payments under a new mortgage
- minimum 3% equity in the home
- loan balance of less than $362,790
- rate has reset or will reset by December 31, 2008.
If you don't qualify under the above terms, you may have to consider other options. Contact the lender to see if they offer additional loan modification options.
Request a Short Sale or Deed-in-Lieu of Foreclosure
Some homeowners won't qualify for a mortgage refinance or a loan modification. In that case, you should consider a short sale or a deed-in-lieu of foreclosure. Although you will still have to leave your home, the affect on your credit and peace of mind will be much lighter. The lender has to approve either option, so contact them to discuss it.
Consider Bankruptcy
Bankruptcy will not permanently halt foreclosure, but it may buy you time or allow you to reduce other debts so you can meet your mortgage payments. Contact a bankruptcy attorney to discuss whether you qualify for chapter 7 or chapter 13 bankruptcy and whether either would allow you to avoid foreclosure.
Lenders are increasingly willing to help homeowners find a way to stay in their homes. Whether your rate has already reset or will reset soon, contact your lender as soon as you know you won't be able to meet the new payments. The faster you act, the more time you'll have to find a solution that avoids foreclosure.