When you are at risk of defaulting on your mortgage, or have already fallen behind on your payments, you may have a number of options for keeping your house:
Refinance your mortgage under the federal Home Affordable Refinance Program, or HARP. Usually, refinancing is available only if you have equity in your home—something that is increasingly rare in many parts of the country. However, under the new government-sponsored refinance program, you may be able to refinance your current mortgage into a 15- or 30-year fixed-rate mortgage. This may not reduce your payment much in the short term, but it will avoid nasty interest rate resets that might be in your future under your current mortgage. More on HARP can be found in our article on refinancing or modifying your mortgage under the Making Home Affordable program.
Lower your monthly mortgage payment under the Home Affordable Modification Program, or HAMP. This government-sponsored program provides a way to lower the monthly payment on your first mortgage to 31% of your gross income. HAMP is also discussed in our article on refinancing or modifying your mortgage under the Making Home Affordable program.
Negotiate for a modification of your mortgage or payment terms outside of the government programs. It’s clear that the government foreclosure-prevention programs are the main attraction. However, for various reasons, you may not qualify for them. Even then, it still may be possible to negotiate a modification with your mortgage lender if, like many, it would rather have you stay in the house than foreclose on it. Especially if you are on your own, you would do well to use a HUD-approved housing counselor to help you head off the foreclosure. The counselor can explain your options, negotiate with your lender, and do a lot for your peace of mind. To find a HUD-approved housing counselor, visit the website of the Department of Housing and Urban Development and click "Talk to a Housing Counselor" or contact the Homeownership Preservation Foundation at 888-995-HOPE (4673) or http://www.995hope.org/.
File for bankruptcy. If you can’t work out an agreement that will let you stay in your house under certain conditions—and you don’t have the wherewithal to reinstate your mortgage under your state’s law (see our Summary of State Foreclosure Laws)—your next step is to explore filing for Chapter 13 or Chapter 7 bankruptcy. Chapter 13 can give you time to make up your missed payments and might lower your other secured debt payments (your car note or a short-term home equity loan, for example). Chapter 7 bankruptcy can quickly do away with credit card and other unsecured debt and free up income to use toward your mortgage payments, thereby allowing you to keep your home.
Challenge the foreclosure in court. Finally, you may be able to successfully challenge the foreclosure in court because of irregularities in the paperwork or the procedures followed by the foreclosing party. You will likely take this route only if your negotiations with the lender have failed.
How Bankruptcy Can Help
Filing for bankruptcy can be a marvelous way either to save your house or at least to stay in it payment free for longer than you would otherwise.
It’s important to understand that Chapter 7 bankruptcy will keep you in your home long-term only if you file while you are still current on your mortgage. It will help you by wiping out (discharging) your other debts, freeing up your income to make your house payments. Chapter 13 bankruptcy, however, can keep you in your home long-term even if you are behind on your payments.