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Should I Skip Mortgage Loan Payments to Qualify for a Cramdown?

Posted by  on Jun 17, 2009
 

Q: I lost my job, so I'm having trouble finding a traditional home refinance deal that will reduce my monthly payment. My current mortgage lender says that I might qualify for a loan modification, but only after I have been default for three months. Should I risk sticking it out with my current loan, or should I skip some payments to qualify for a cramdown?

A: If you're able to make your monthly mortgage payment now without putting stress on your other bills, I'd recommend staying the course. Otherwise, you could put yourself on a slippery slope to foreclosure.

New government-backed assistance programs make it more attractive for your mortgage lender to offer a modification instead of taking the long road to foreclosure. The target monthly payment for a fixed rate mortgage under the Obama administrations modification guidelines is 31% of your gross monthly income. If you're accepting unemployment benefits or working a temporary job to make ends meet, your lender might find it harder to work with your current gross income than with your previous salary. As you've already discovered, though, few mortgage lenders are willing to lend money to unemployed Americans in today's market. Skipping mortgage payments will only damage your credit score, making it tougher for you to qualify for other loans in the future.

Without careful attention to personal budgets, three out of four homeowners who qualify for mortgage modifications may find themselves back in default. According to analysts at Fitch Ratings, who have been reviewing mortgage lenders' portfolios, roughly 75% of loan modification deals don't address the root issues behind a homeowners' failure to make monthly payments. Still, lenders and borrowers who take risks on loan modifications fare better than most Americans who faced situations like yours over the past few years.

Keep looking at the bigger picture. If you're in the ballpark, most mortgage lenders will work with you, as long as you can show them that you're willing to make mortgage payments a priority in your budget. That may mean canceling cable television for a little while or putting your dream vacation on hold. It also means cutting up credit cards, so you can't fall deeper into debt. Follow these principles, and you should make out okay.

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