QUESTION: My daughter is in an interest-only loan with a 30-year term. Her interest rate is 8%. She owes $128,000 on the loan. Fannie Mae owns the loan.
She has tried to refinance her home. We thought that she could refinance her loan under the Making Home Affordable Plan, but she was told she makes too much money to get help.
What would happen to her if she walks away from the home, and what are the penalties? Can she be sued for the principal, and can they garnish her wages? She has a good job, and if her wages were garnished, she would lose her employment. She is a single mom with no outside help.
ANSWER: Your daughter does have a high interest rate on her loan based on where interest rates are today. But her loan is an interest-only loan, which means that her monthly payments are much lower than they otherwise would have been. Did your daughter take out an interest-only loan to lower her monthly payments so that she could afford to buy the home?
You didn't mention that your daughter can't afford to make the payments. You seem to be asking what she can do to find a lender willing to refinance her mortgage.
Is she having a problem with the equity in her property? If the value of her home has dropped, she may not have enough equity to do a refinance. Most lenders will allow her to borrow only 80% of the home's value. If her old loan is greater than what her home is now worth, a lender won't give her enough money to pay off the old debt.
You might want to wait and see whether your daughter can benefit from the recent changes that are being made to the Home Affordable Refinance Plan (known as HARP 2.0). It is designed for homeowners who want to refinance but whose homes are worth less than the mortgage balance. It may be that the HARP 2.0 guidelines will allow her to refinance her home. (Get more information on the program at MakingHomeAffordable.gov.)
If your daughter walks away from the home, she runs the risk that the lender will pursue her for any money owed on the loan. Although in some states there are laws that prevent deficiency judgments against borrowers, many states allow them.
If the lender does not get fully paid off, it can take an additional step after the foreclosure and ask a judge to issue a judgment for that difference, a deficiency judgment. A borrower then runs the risk that the lender might pursue him or her to garnish the borrower's wages or find assets the borrower might have that could satisfy what is owed.
But let's hope there is a refinance in your daughter's future so she can afford to stay in her home. She should talk to a good mortgage lender or mortgage broker to evaluate her options.
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