What You Need Negotiate with Your Bank

One common method that homeowners in foreclosure may have available to save their homes is to put together an agreement with the mortgage company to repay the amount they are behind over a period of time. This is called a forbearance agreement. Another similar option is working with the lender to alter the terms of the loan through a mortgage modification, which may result in the missed payments being put on the back of the loan, or the interest rate being lowered for a period of time. Both of these plans can give homeowners an important opportunity to get back on track with the mortgage, but lenders have strict guidelines that must be met to qualify for this type of program. Homeowners will have to fill out various forms and submit their personal financial documents in order for the bank to consider offering them one of these solutions. The importance of having these documents completed and accurate can not be overstated, as banks may just let the file sit until the package is complete.

Possibly the most important document the homeowners will need to submit is a hardship letter, explaining how they fell behind and what they have done to recover from the hardship. They should also state how the problem has been solved so that it does not recur in the future. This gives the homeowners an opportunity to describe the crisis as beyond their control, such as sudden medical problems, a death in the family, divorce, or job loss, among other possibilities. Often, the hardship letter can contain various solutions that the foreclosure victims are proposing the bank consider, as well as statements that they will be able to pay the mortgage on time from now on. The hardship letter is the tool homeowners use to make their case to the mortgage company of why they should not be foreclosed on, but given another chance.

Another important piece of the financial puzzle for the bank is recent paystubs, showing how much the homeowners earn. The mortgage company will want to evaluate whether or not there is a strong possibility of the loan being repaid in the future. A current stable income is one of the best ways they can decide how much the homeowners can reasonably afford, and how long the payment plan term should last. Obviously, since the foreclosure victims are attempting to pay their normal payment as well as a portion of the arrears every month, the lender will have to make sure this does not take up too much of the homeowners' income. If the repayment plan is too expensive, the loan will go back into default and foreclosure. The paystubs should show income over at least a period of one month, and they should be recent and consecutive. Submitting one from August and another from November does not show a stable income.

Bank statements are also important, for two reasons. The first is to show the lender that there is an emergency fund or extra cash in the bank that the homeowners can use if they fall behind again. The second reason is to show the bank what kind of spending habits the foreclosure victims have engaged in since falling behind. If they have been saving money or using their lowered income to keep on top of other bills, then the bank will look more favorably on offering a payment plan or loan modification. However, if the bank statements show that the homeowners have been spending money on unnecessary items, such as frequent shopping trips or online purchases, when they could have been saving money to pay the mortgage, this indicates to the lender that the homeowners are irresponsible with their money and will have trouble in the future paying the mortgage. Bank statements should also be recent and consecutive in order to give the bank a more general overview of the homeowners' spending habits.

The final documents that homeowners will need to present to the bank are tax returns for the previous two years. Tax returns show the lender that the homeowners have generally stable income, but suffered from a temporary hardship causing them to fall behind. This is important, because it serves as evidence backing up the claims made in the hardship letter that the crisis was involuntary, unavoidable, and uncommon, although it has not been rectified. Simply filing tax returns also shows that the homeowners are not trying to get out of paying their federal income taxes and shows that they were not just trying to get out of paying their mortgage for a few months. But the actual financial data will be most important, as a stable or increasing income will prove to the lender that the homeowners are generally financially stable over the longer term.

Besides these documents, lenders will often have their own forms and financial status reports that must be filled out. But homeowners who are working with their lenders, or working with a loss mitigation company to deal with the lender for them, need to be aware of the importance of having these documents. Without all of them, the mortgage company can not make the most informed decision possible about the current state of the foreclosure victims' finances, and they will turn down the proposal for a repayment plan or loan modification. It would be a tragic occurrence if the homeowners lost their homes to foreclosure simply because they did not have this information readily available to be submitted to the lender. Thankfully, loss mitigation companies and the banks provide checklists to the homeowners to make sure they have submitted everything necessary, but a failure to read and comply with these documents will typically result in a failure to save the home.