A loan modification may be the best answer. Modifications can take several forms, such as:
- Decreasing the interest rate on the loan
- Increasing the term of the loan (extending it)
- Forgoing late charges
Any of these modifications would reduce the monthly payment on the loan and make it more affordable to the home owner.
The federal government had a modification program: Home Affordable Modification Program (HAMP). The requirements to qualify are rather stringent. However, about 20 states require mediation before foreclosure; New York, Connecticut and Florida actually require it.
Because of the mediation requirement, banks have been working with homeowners on modifying their mortgages and the results have shown that the mediation program has kept more people in their homes than HAMP. However, with HAMP the modified payment is generally lower than with the mediation method with a bank. Time will only tell how these modified loans will perform, but statistics (and logic) shows that the lower the payment, the greater the chance the loan will perform.
If you're in a tight situation with your home loan, you might want to ask your bank about modifying your loan. A loan modification is actually preferred by banks to foreclosure because it is less expensive and less time consuming.
Wouldn't you rather stay in your home and keep that hard-earned equity?