Facing foreclosure? 9 options
Real estate markets are slowing. Interest rates are ticking
up the phones are ringing at ByDesign, a
Los Angeles-based credit counselor, as homeowners start
to panic about not being able to make their mortgage payments.
"The number of people asking for appointments to talk
about foreclosure is definitely up," said Susan Ulaga,
the nonprofit service's senior vice president of counseling.
Rising rates "are really putting a crunch" on homeowners
with adjustable-rate loans.
Nearly a quarter of the nation's mortgages have rates
scheduled to reset this year or next, which means higher
payments for millions of homeowners. How many will default
isn't known, but the Mortgage
Bankers Association, which tracks delinquencies and
foreclosures, expects a "modest" uptick in both by the
end of the year.
If you're in danger of falling behind on your mortgage,
or if you're already delinquent, it's important to know
what's ahead and what your options are. Usually, the faster
you move, the more choices you'll have about your financial
future.
The timeline
30 days: Your troubles actually start
as soon as you miss a single payment. Lenders may not
contact you until you've skipped a second payment, but
most will report the first late payment and every subsequent
delinquency to the credit bureaus. Even a single late
payment can devastate your credit score, the three-digit
number that lenders use to help gauge your creditworthiness.
Each subsequent "late" further decreases your score,
making it more difficult and expensive to get a loan
or a refinance that might help your situation. In addition,
lenders typically tack on late fees of 5% or so for each
missed payment.
90 days to one year: Eventually,
if the payments aren't made, the lender will file a "notice
of default" with a local courthouse and send you a
letter saying that the foreclosure process will start
unless you make good the missing payments
How quickly the notice is filed depends on the individual
lender. Some hold off if you contact them to work out
a payment plan or otherwise explain your situation.
Others are more aggressive and start the process as
soon as possible to try to protect their investment.
"They may do it as early as 90 days, or as late as
a year," explained Anthony Hsieh, president of LendingTree.com. "It
really depends on the lender's temperament."
Usually, this notice means that the amount you owe
has shot up as well, since the lender typically adds
substantial fees to cover its legal costs.
The notice of default "is a big threshold," Hsieh
said. "Once you get into that state, it's a whole different
world. Your options are fewer."
The notice of default is generally picked up by the
credit bureaus, further depressing your credit score
and making refinancing the loan extremely difficult.
(In addition, the notice tips off scam artists that
you're in trouble and may be vulnerable to various "equity
skimming" schemes. One common ploy: The scam artist
promises to take over your payments, but instead rents
out your house and keeps the rent payments as pure
profit. The home goes into foreclosure, your credit
is trashed and you've lost any equity you had in the
home.)
90 days more: Borrowers typically
have 90 days from the notice of default to make up
the deficit before the lender sends out a "notice of
sale," which sets a sale date for the house (typically
within the next 15 to 30 days).
Some lenders will allow you to keep your original
loan if you can make up the missing payments plus any
late fees and legal charges. Others will insist you
refinance with another lender. You can also halt the
foreclosure, at least temporarily, by filing a lawsuit
or filing for bankruptcy. For either legal option to
work, you'll have to be able to come up with a payment
plan to fix the deficit.
Your options
Lenders today typically offer a variety of solutions
for people who have fallen behind on their mortgages.
Among them:
- Temporarily reducing or waiving payments.
- Setting up short-term repayment plans to help you
make up the deficit.
- Adding the unpaid balance to the principal of your
loan and increasing your payments slightly to cover
the extra amount.
If you have certain types of loans, you may have even
more options. If you have a mortgage insured by the Federal
Housing Administration, for example, you may qualify
for an interest-free (and payment-free) loan to get
your mortgage current. The money doesn't need to be
paid back until you pay off the mortgage or sell the
house.
If you can work out a solution with the lender quickly
enough, you can contain or even avoid serious damage
to your credit. That's among the reasons housing experts
typically urge you to call your lender as soon as you
know you'll have trouble making a payment.
This is good advice, but trickier than it may seem
at first, for two reasons:
Lenders can make it tough to get to the right
people. The folks you want to talk to are
in the "loss mitigation" department. But many lenders
don't routinely route borrowers to that department
until they've missed several payments. Until then,
you might be dealing with the lender's collections
department, which typically offers one option: Pay
up now. If you're serious about keeping your home,
you may have to really push to get to right people.
"The loss mitigation department (is) where the options
are really going to open up," ByDesign's Ulaga said.
You have to be able to make the payments. If
you agree to a lender's "workout" or "loan modification" solution
and then fail to make the agreed-upon payments, you'll
be in a world of hurt. At best, you'll have "a lot
fewer options the second time around," Ulaga said.
More likely, Hsieh said, the lender will simply accelerate
the foreclosure process.
This can be a big problem if the financial crisis
that caused you to fall behind isn't over. If you don't
know where you're going to get the money to make the
payments, trying to work out a solution with your lender
will be tough.
"If you're honest like that, (lenders) are not going
to want to work with you," said New Jersey bankruptcy
attorney John Amorison. "If you're dishonest, you breach
the agreement."
That's no reason to hide from your lender or ignore
its letters, Hsieh said. Even if you can't work out
an agreement, keeping in contact is usually the right
choice: "At least you know where you stand."
Filing a lawsuit or bankruptcy carries similar risk:
If you don't have the money to make the payments, the
foreclosure can proceed, and you may have further damaged
your credit score.
9 steps to getting out of this mess
So what to do? First, you'll need to take a hard, clear-eyed
look at your financial situation. To that end:
Make a budget. Sketch out a spending
plan for the next several months, including expected
income and expenses. See what costs you can trim to
free up as much money as possible for home payments.
You may need to pay the minimums, or even less, on
other debts. In certain very limited circumstances
-- such as when you are absolutely sure your financial
hardship will be short-lived -- it may make sense to
skip payments on some bills so you can pay your mortgage.
Read "How
to not pay your bills" to learn about the consequences
that may follow. Another option: borrowing money from
friends or family, or tapping retirement funds. Do
the latter only if you're convinced you can
make future payments; you don't want to drain your
retirement funds if you're only going to end up losing
the house.
Consider getting help. Legitimate
credit counseling services, those associated with the National
Foundation for Credit Counseling or the Association
of Independent Consumer Credit Counseling Agencies,
typically have housing counselors that can help you
evaluate your options. Or you can find a housing counseling
agency approved by the Housing and Urban Development
Department by calling (800) 569-4287. If you have a
Veterans Administration loan, you can call (800) 827-1000
to get a referral to a financial counselor.
Check your refinance options. If
you have equity in your home, your credit rating is
relatively intact and your lender hasn't yet filed
a notice of default, you may be able to get another
loan with more affordable payments. An experienced
mortgage broker, preferably one affiliated with the National
Association of Mortgage Brokers, can let you know
your options. Be cautious about jumping into another
risky loan, though: adjustable, interest-only or "option" mortgages
might just put off the day of reckoning and you could
find yourself facing even higher payments down the
road.
Be realistic. Many times, Amorison
said, people struggle to hang on to a house that they
simply can't afford when they'd be far better off without
it.
"People are just too tied to their homes," Amorison
said. "It's just property."
That may seem harsh, but it's far better to sell a
home while you still have equity and some semblance
of a credit score than to have it taken away in foreclosure.
Get organized. If you are going to
try for a loan modification, you'll need to prepare
a small mound of documentation. The lender will specify
what it wants, but typically you'll need to supply
the details of your financial situation, a budget,
documentation of your hardship (a letter from your
doctor explaining an income-reducing illness, for example,
or your layoff notice from your employer) and a "hardship
letter" that outlines, in heart-rending detail, the
circumstances that led you to fall behind and the improved
prospects that will allow you to get your financial
life back on track.
You may also want (or be required) to provide a market
analysis of your house, Ulaga said, to document how
much equity you have in your home. A real estate agent
can typically prepare this for free in exchange for
the chance of winning your business should you decide
to sell.
Leaving home
If a loan modification or refinance isn't possible or
feasible, your options come down to these:
Sell the house. If you have enough
equity in your home to allow you to pay off your mortgage
in full, after deducting any real estate agent commissions,
then a quick sale is usually your best option. You'll
preserve what's left of your credit score and your
equity, leaving you in a much better position should
you want to buy another home in the future.
Offer a deed in lieu of foreclosure. If
you can't sell the house for what you owe, but you're
not deeply "upside down" on your mortgage, this may be
an option: you propose handing over the deed to your
home and your lender agrees to release you from your
mortgage. This usually keeps you from having to pay any
deficit that might be owed on the property, while the
lender avoids further legal costs related to a foreclosure.
Lenders can't be forced to accept a deed, however.
Typically, lenders require that the borrower make "a
really good effort" to sell the home first, Ulaga said,
and show that their delinquency was due to "unavoidable
hardship" before they'll agree to a deed in lieu of
foreclosure.
Negotiate a short sale. If you owe
substantially more on your home than it's worth, you
may be able to get the lender to accept less than it
is owed by negotiating a "short sale." You essentially
sell the house for whatever you can get, and the lender
agrees to accept the proceeds and not go after you
for the deficit.
A short sale can further damage your credit scores,
often showing up as a "settlement" that indicates
you paid less than you owed. You may also face an IRS
bill on the unpaid debt, which is generally considered
income to you. A skilled negotiator may be able to
avoid these consequences or at least minimize them,
so you may want to consider getting an experienced
attorney's help.
Allow the foreclosure to proceed. This
is generally the worst choice. In some states and in
some circumstances, the lender can even go after you
in court for any deficit between what the house eventually
sells for and what you owe. An attorney or housing
counselor can let you know if that's a possibility.
Even if the worst happens, though, the damage to your
financial life needn't be permanent. If your situation
improves, you may be able to get another mortgage,
at a reasonable interest rate, within a few years.
For more details, check out "Bounce
back fast after bankruptcy" for suggestions on
how to rebuild your credit after financial disaste
