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Facing foreclosure? 9 options
Check your options, get help, be realistic -- and most of all,
don't dawdle.
By
Liz Pulliam Weston
Real estate
markets are slowing. Interest rates are
ticking up. And 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 disaster.
Conclusion
Are you one
of the many that suffer from insurmountable
debt and wonder if bankruptcy is an option?
Give us a call at (203) 924-6700 or
contact us.
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At these seminars an attorney will personally go over your
mortgage looking for a defense