Facing Foreclosure? Here’s What You Can Do
One of the things homeowners don’t often like to talk about is the possibility of foreclosure. Even if you have great credit and squeaky-clean financial habits, it’s nonetheless possible for the unexpected to happen or hard times to befall you. Medical bills, an illness, or a job loss can all land you in a sticky situation in a hurry, and for the most part, this is what tends to drive homeowners into foreclosure.
It’s important to remember that it’s not the end of the world when you get that dreaded letter from the bank in your mailbox. Most of the time you’ll receive plenty of warning before your home goes into foreclosure (i.e., default notices). The first thing we’re going to suggest is that if you’re unable to make even one payment due to an emergency or unforeseen circumstances, it’s important to let your lender know right away. There are some steps you can take before foreclosure is on the table, so if you know you’re in trouble, don’t hesitate to take preemptive action.
Before we get to that, though, it’s important to note that most households have a fair amount of assets that can be used to make payments and delay foreclosure. Unemployment insurance, disability insurance and savings are each potential cash sources, as are furniture and electronics. Household budgets can be slashed. Cars can be traded in for cash. Retirement funds are often available, but remember that withdrawals may result in penalties and additional income taxes. The long and short of it is that if you’re having trouble making your mortgage payments, downsize your lifestyle as quickly as possible and liquidate what assets you can.
If selling assets isn’t enough to offset your mortgage payments and it looks like they’ll remain unpaid, then you need contact the lender as soon as possible. At this point your goal is to help the lender create a “workout” agreement that effectively modifies your mortgage so that the foreclosure can be stopped before going to completion. Once you enter into discussions with a lender, there are quite a few options that are available. While lenders are typically not required to modify loan arrangements, many will because if they repossess the property, they’ll likely lose money auctioning it off. Most lenders would prefer to work something out with the homeowner, within reason.
Loan modification is an option when the borrower experiences difficulty making regular mortgage payments as a result of a permanent or long-term financial hardship. It works by reducing an above-market interest rate to a market rate or by extending the original terms of the note, which might make it easier for you to continue making payments. Even a temporary rate reduction of one to three years can provide a substantial amount of relief. Loan modification is similar to, but not the same thing as, forbearance, which allows you the right to skip a payment or make smaller payments for up to a year.
Repayment plans allow you to repay a missed payment in smaller increments over the course of several subsequent payments. For example, if you need to miss a payment and each payment is $1,200, you might pay $1,275 a month until the missing money is repaid. The catch is that you have to make your subsequent payments in full plus the percentage of the missed payment, and it’s really only a viable option if you’re missing one payment and can make the following ones. Reinstatement, on the other hand (also called a “temporary indulgence”), allows you to bring your loan current if you’ve missed a few payments and pay late fees and other costs, and the loan continues as before.
A claim advance is possible if you bought your home with less than 20 percent down. In that case, either the loan is self-insured by the lender or you have private mortgage insurance (PMI). In some cases PMI companies will provide a cash advance to bring the loan current, which is sometimes interest free and need not be repaid for several years. Private mortgage insurers typically require lenders to begin foreclosure proceedings once a delinquency reaches 150 days or when a sixth missed payment is due, so both they and the lender have an incentive to work with you, but it’s important to remember that neither is legally required to.
Re-amortization is another option, and adds your missed payment to the outstanding loan balance. This brings your account current, but since your debt has increased, future monthly payments may be larger unless the lender agrees to lengthen the loan term. You can also do what’s called a “deed-in-lieu,” which allows you to sign over legal ownership of your home to the lender in exchange for the lender’s agreement not to foreclose.
Refinancing your loan is another option, but only if you have good credit. Refinancing permits low monthly payments for the first several years of the loan term and then much higher monthly payments thereafter. This can get you out of a jam, but keep in mind that the other shoe will drop in a few years and you’ll be facing much higher payments in the future. If you anticipate financial bumps in the road coming up, or if you have a loan where soaring payments are a certainty, don’t wait to refinance; do it now while you have a strong credit profile and no missed payments.
All of these options aside, there are still some situations in which no workaround arrangement or refinancing option can save your property. If a job is lost, medical payments are overwhelming, or mortgage payments are increasing to the point of bankruptcy, the only realistic choice may be to sell the property. If the situation is getting worse every month, you have to protect your interests and sell the property. This is a difficult choice, but if you sell before foreclosure you’ll get a better price for the property and preserve your credit standing.
If you’re facing foreclosure, remember that you don’t need to panic because you have options available to you, but you have to act quickly. Also, don’t rule out seeking out foreclosure assistance. For more advice on real estate and homeownership, be sure to sign up for our mailing list and monthly newsletter, and don’t forget to follow us on Facebook and Twitter!
– Get It Right Solutions