Helpful Tips for Mortgage Debt Relief

Need a fresh financial start with mortgage debt help, a chance to level your cash flow playing field?

Several options exist today to help you reduce or eliminate debt, including debt management, debt consolidation, and bankruptcy. Bankruptcy is the least desirable of possible solutions because you must first qualify to file for bankruptcy and, if you succeed, your credit reputation is tainted for ten or more years and is difficult to reestablish.

Homeowners can tap the equity in their existing real estate property to consolidate nonmortgage debt payments. A homeowner holding a single mortgage may be able to consolidate nonmortgage debt by refinancing the existing mortgage to include nonmortgage debt, or take out a new second mortgage.

With two mortgages, a homeowner can consolidate nonmortgage debt by refinancing the first mortgage with cash out and not touching the second. Another option is to consolidate nonmortgage debt and the second mortgage in the first with a cash-out refinancing of the first. A third option is to consolidate nonmortgage debt in refinancing the second home, leaving the first as is.

The best choice is based on the total cost to the homeowner over time. The homeowner should consider total monthly payments, including the mortgage payment, personal insurance payments, if any, and nonmortgage payments. Other considerations are tax savings, actual debt reduction by paying down nonmortgage debt, and whether or not any of the debt contracts include prepayment penalties.

Hope for Homeowners Legislation

A debt relief option that began in 2008 is the Federal government's Hope for Homeowners initiative.

The plan was established to help qualified homeowners avoid foreclosure by lowering their monthly house payments. Under the plan, homeowners may temporarily or permanently have their interest rates lowered. Others may have part of their mortgage debt eliminated entirely, while some may receive a combination of reduced rate and loan forgiveness. A portion of the plan applies specifically to customers of Countrywide Financial home loans. As with any restricted government plan, some homeowners who need mortgage debt help will not qualify for any of the plan's provisions.

Qualifying Criteria

The homeowner must demonstrate a trustworthy financial character, as measured by not having included false statements or facts on the loan application, not purposely reneging on paying other debts, and not having been convicted of fraud in the past ten years.

The mortgage must apply to the borrower's primary residence, not to an investment property or a second home. The mortgage must have been originated before January 2, 2008, and at least six payments must have been made. The homeowner must show that the mortgage payments constitute more than 31 percent of the homeowner's gross income and that without debt relief the house payments are unaffordable.

Veto Power of Second Lien Holders

Holders of second liens, such as home equity loans or lines of credit, can veto refinancing under the Hope for Homeowners plan because they will lose their stake in the property if the plan is approved for the homeowner.