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Modify Mortgage With Bad Credit

Can I modify my mortgage if I have bad credit and significant credit card debt?

My only income is a State Pension and Disability. I stopped paying my credit cards. I read what you said to put on my account contains pension and Social Security only. They call me all day long. Should I write and tell them that is my only income or just do nothing. I also applied for a loan modification, can the creditors mess that up in any way.

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Bill's Answer
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Highlights

  • Mortgage servicers may not modify a mortgage if the source of distress is not mortgage related.

You mentioned a modification, so I deduce you own your home. Let us look at the general qualifications for the Home Affordable Modification Program (HAMP) that most mortgage servicers follow:

  1. Be the owner-occupant of a one- to four-unit home.
  2. Have an unpaid principal balance that is equal to or less than:
    • 1 Unit: $729,750
    • 2 Units: $934,200
    • 3 Units: $1,129,250
    • 4 Units: $1,403,400
  3. Have a first lien mortgage that was originated on or before January 1, 2009.
  4. Have a monthly mortgage payment (including taxes, insurance, and home owners association dues) greater than 31% of your monthly gross (pre-tax) income.
  5. Have a mortgage payment that is not affordable due to a financial hardship that can be documented.

A modified mortgage can consist of any combination of the following, according the HAMP Web site:

  • Lower the interest rate. Treasury is providing incentives to your servicer to write the interest down to as low as 2%, if necessary to get to a payment that you can afford. Each homeowner's interest rate will only be reduced to a point sufficient to get the modified payment to equal 31% of the homeowner's gross monthly income. Not all homeowners will need a rate reduction to 2% in order to achieve a monthly mortgage payment that is affordable.
  • Extend the term. If a 2% interest rate does not result in a payment that is affordable (no more than 31% of your gross monthly income), your servicer will extend your payment term. At the servicer's option, the term of the loan could be extended up to 40 years.
  • Forbear (defer) principal. If your payment is still not low enough, your servicer may defer a portion of the principal amount you owe until the maturity of the loan. This is called a principal forbearance. With a forbearance, you will still owe the principal; but repayment is deferred until a later date.
  • A portion of the principal could be also be forgiven.

Your Question

Your delinquent credit card debt gives me pause. It is unfortunate you did not include the amount of your credit card debt, the balance of your mortgage, and the value of your home in your message.

These facts are significant because of HAMP qualification No. 5 mentioned above. If the reason for your financial distress is crushing credit card debt, then the mortgage servicer may not be inclined to modify your mortgage.

This is not to say that anyone with credit card debt is automatically disqualified from HAMP or any other mortgage modification plan. If, for example, you can show the reason for the credit card debt was the mortgage, then the credit card debt was a result of and not a cause of your financial difficulty. On the other hand, if your credit card records show a history of buying electronics, vacations, meals in restaurants, and other luxuries, then the mortgage servicer will not be sympathetic to your application.

You asked if you should send a message to your credit card issuers or their collection agents telling them that your only income is pension and disability in hopes they will cease calling you. I doubt such a message will change their behavior. They may sue you for breech of contract and obtain a judgment against you. With a judgment in hand the judgment-creditors may discover you have significant other assets in the form of other bank accounts the creditors can reach with a levy. I deduce you own your home. A judgment-creditor may have the right in your state to place a lien on your home. Therefore, telling a potential judgment creditor, "You can't touch my pension and disability benefits," does not tell them anything about other assets you may have available for collection.

Consider resolving your credit card debt as a part of or prior action to modifying your mortgage. See the link I mentioned to understand your options, or get a quote from the Bills.com Debt Saving Center.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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2 Comments

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  • PM
    Aug, 2011
    Pam
    Sacramento, CA
    I was left this house in a will 2008 and she took out a loan on this property before she past away. I am on disability and have not been able to make the payment on the loan or the taxes and the city bill since April of 2009. B of A asked me to fax a copy of the taxes and the city bills so they could pay it to avoid a lien and they did not comply. The deed is in my name only and the bank has said they did a charge off on this loan. What does this mean for me, since my nae is not on the loan but is on the deed, do I own this house out since it was a charge off on the borrower.The loan was a 100,000 thousand dollar and the value is way down. My credit is so bad that there is no way I can get a loan. What can I do?
    0 Votes

    • BA
      Aug, 2011
      Bill
      Pam, if your name is on the deed, then you own the house, although the lien the bank has needs to be paid if you sell the home. I am concerned that you're placing your house at risk by not paying your taxes for over two years. You need to speak with an attorney. If you can't afford one, make an appointment with a legal aid organization.

      Do you know how much the home is worth? If it is worth more than is owed, then you may need to consider selling it. Just because the debt was charged-off, does not mean the lien is not in place.
      0 Votes

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