Fire Your Lender! (Refinance!)

If you are unable to get the lender to work with you on any sort of payment arrangement or forbearance agreement, you should immediately see if you can refinance the property.  A refinance loan is a new loan that pays off your old loan completely.  The old lender goes away and you start with a clean slate with your new lender. Since your relationship with the old lender has soured, this may be a very attractive option!
Once again, keep your eye on the calendar.  There may not be time to refinance if you are already approaching the sheriff’s sale. For example in my state of Texas, from the time the foreclosure is posted to the sale date is only three weeks.  It may be difficult to close a loan in three weeks – but worth a try. In fact, if your loan is approved you may be able to get your current lender to delay the sale to give you time to close, but you will likely have to provide sufficient documentation that you are working with another lender.
In any case, it is important that you continue to work on other solutions simultaneously. If the refinance doesn’t go through, you want to have a back-up plan in place.  Don’t put all your eggs in one basket. More than one homeowner has seen a refinance fall through at the last minute and had their house auctioned at the sheriff’s sale before they could come up with another solution.
If you can refinance your home, your problems with your lender go away because THEY get paid off and go away.  You’ll then have a new loan with a new lender.  You’ll probably get to skip a month’s payment as a bonus.  (I understand many folks in the mortgage business refinance their house every November so long as interest rates aren’t rising, then they use their December house payment money to pay for Christmas presents and a vacation.  Not bad!) Heck, depending on the interest rate on your original loan, this may be a great deal for you anyway - your payment could even go down.

Loan-to-Value
A key factor in your ability to get a loan, especially if your credit is damaged, is the Loan-To-Value (LTV) ratio. If you have a low enough LTV, not only will you be able to get a loan easier, but you may be able to “cash out some equity.”  Equity is the difference between the value of the house and the amount you owe on it. Here are two examples of how equity in your house could increase.
1) You bought your house for $100,000.  It is worth $100,000 today, but in the course of making payments over the past several years, you have paid off $10,000 of the principal, so you only owe $90,000 and have $10,000 equity in your house. $90,000 / $100,000 = .9, so you have a 90% LTV.

2) You bought your house for $100,000.  The value of your home has increased to $120,000 today, and in the course of making payments over the past several years, you have paid off $10,000 of the principal, so you only owe $90,000 and have $30,000 equity in your house. $90,000 / $120,000 = .75, so you have a 75% LTV.

Thus, if real estate values in your area are increasing, you may have built up some equity in your home without even knowing it.  Ask your new lender “How much equity can I cash out?”  They might say none, but if they let you, why not get a little extra cash so you can have money to make the first few house payments or other expenses for a few months? Be responsible here - don’t cash out $20k in equity and take the family to Europe for the summer.  But if you have the ability to cash out some equity, do so.  Once you’re back on your feet, if you want to take the extra money out and pay it towards principal on the loan, you can do so.

Debt-to-Income
Another important ratio that your lender will be interested in is your Debt-To-Income (DTI) ratio. This is the ratio of how much you have to pay for your expenses and bills to how much income you bring in each month. The historical figure that mortgage lenders have required for a loan to be approved is a 36% DTI.  If you have much higher than that, you may have to look to private lenders for a loan.
I have two further suggestions regarding refinancing your home:

1. Get SOMEONE who understands mortgage loans (your banker, cousin, friend, dad, etc) to review the terms of your new loan before you sign on the dotted line.  You need to UNDERSTAND what you are signing and the ramifications to your payment, interest rate, payoff amount, loan term, etc.  Your NEW lender is not the best person for this, because your contact is probably earning a commission on closing your loan, and they may not give you 100% unbiased information.  Look before you leap!

2. If you cash out some equity, go to the bank and open a separate savings account.  Deposit in the savings account, NOT your checking account!  It will disappear out of your checking account in no time!  Withdraw that money ONLY if you really need it for your house payment, food, etc.    Don’t spend it all and find yourself back in this mess again!
Get the Facts Early
When working with a company to get a refinance loan, be sure to ask early on in the process for a realistic, good-faith estimate of their fees and what the interest rate will be. In the sub-prime market (if that is where you are at, and you probably are if your credit is damaged) it is normal to see high interest rates, but what you don’t want are surprises at the closing table.  Some lenders charge exorbitant loan initiation fees or closing costs to try to mask the true cost of the loan. Be sure to let them know you want to know how much all of that is going to cost up front, and that you do not want any surprises at the closing table. You should also get the name, phone number, and email address of your closing agent from the lender. The closing agent will work for a local attorney or title company. Contact the closing agent and ask them to fax or email you a copy of the preliminary closing statement just as soon as it is ready. Ask them to send a new copy any time there are changes throughout the process. The closing statement is called the “HUD” in the business, because everyone uses the HUD-1 Settlement Statement provided by the U.S. Department of Housing and Urban Development.  That form breaks out exactly where every penny goes in a real estate closing.

Lenders
 For a list of lenders, please see the resources page at: http://www.stop-foreclosure-manual.com/resources.html.
If you have decent credit but have just fallen on hard times recently, go to an online service like eLoan and make them compete for your business. If your credit is not-so-hot (what lenders call “sub-prime”), try Countrywide Home Loans. You can fill out the application on their site from the privacy of your home and not have to talk to any human until later.  Remember, too many credit apps in a short period of time will hurt your credit, so just pick one or two and see what they can do for you.
Another option is to try a company called Abacus Credit & Loan. Abacus maintains a database of sub-prime lenders, including many who will loan you just the amount for your back 3-4 payments. According to their web site, they have been in business since 1998, they specialize in helping people with terrible credit – in fact they guarantee they’ll get you a loan.