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Avoiding Foreclosure

Home foreclosures reached unprecedented numbers in the last few years due to the housing crash at the end of last decade. Sub-prime lending, mortgage fraud, over-speculation, and people simply living beyond their means are only some of the reasons for the housing market mess.

Fortunately, the economy and housing market is recovering, which means foreclosures are slowing down. However, there are still plenty of homeowners who are struggling and may end up joining the ranks of those who have already lost their homes. You may be among them.

Foreclosure has far reaching financial consequences and is one of the worst things you could have listed on your credit report. However, you may have other options. There are many ways for you to save your home and avoid going into foreclosure. Read on to see if any of the following could assist you with your situation.

What Kind of Mortgage Do You Have?

So many homeowners (and potential homebuyers) simply do not understand the logistics of home loans. With so many different options available it is easy to get confused. Do you know what kind of a loan you have? Do you know if your payments will change over time? If you are not completely clear on the aspects of your loan and cannot understand your mortgage documents, contact your loan servicer (the person responsible for collecting your monthly loan payments and crediting your account) and ask questions until you are clear.

Mortgage Options:

  • Fixed Rate Mortgages: This is where the interest rate is fixed (doesn't change) for the life of the loan. This means that your payments should stay the same. Change in payments would only result from changes in your taxes and insurance if you have an escrow account with your loan servicer. An escrow account is funds, property, or other items of value left in a trust to a third party.
  • ARM (Adjustable Rate Mortgage): This is where your payment changes every time the interest rate changes.
  • Hybrid ARMs: These mortgages have fixed payments for a few years and then convert into adjustable loans. There are many different variations of hybrid ARMs such as 5/1 or 3/1; the first number refers to the years the loan has a fixed rate and the second number refers to how often the rate changes. For instance, in a 5/1 the interest rate is fixed for five years then adjusts every year thereafter. There are also such hybrids as 2/28 or 3/27; the first number referring to the years the loan has a fixed rate and the second number refers to the years the loan has an adjustable rate.

Trouble Making Payments?

If your rate adjusts, making increased mortgage payments difficult to meet, you may be able to refinance to fixed-rate loan. Go over your current loan contract first to see if any prepayment penalties will be assessed. If your ARM carries prepayment penalties, the original lender could charge you thousands of dollars if you refinance within the first few years of the loan. If you are planning on staying in your home for a few years or more then a fixed rate mortgage may be the better option.

Negotiation Strategies

If refinancing isn't a wise move there are still other options. Contact your loan servicer as soon as you see default as a possibility. The earlier you call the more options you will have available to you. Be prepared to show that you are making a good-faith effort to pay your mortgage. Demonstrate that you have reduced other expenses in order to meet your mortgage obligations; by doing this, your loan servicer will be more likely to negotiate with you. If you don't negotiate with your loan servicer, it usually only takes three or four missed payments before they will begin the foreclosure process. Once that happens, generally you will need to come up with all of the missed payments, plus any late fees, to keep your home.

If you are in default, there are a few different negotiating strategies you could use.

  • Repayment Plan: If you have only missed a small number of payments, your servicer could give you a fixed amount of time to repay the amount you owe by adding a portion of what is due to your regular payment.
  • Reinstatement: For temporary financial problems, you and your loan servicer can agree upon a date when the entire past-due amount, plus any late fees or penalties is to be paid.
  • Forbearance: This is where your servicer agrees to reduce or suspend your payments for a period of time the two of you agree upon. At the end of that time period you resume with your regular payments plus a lump sum payment or additional partial payments for a designated number of months to bring the loan current. Forbearance may be a good option if your income is temporarily reduced or your financial troubles are for a very short term. Forbearance won't help if you are in a home that you can't afford and will only get you further in the hole.
  • Loan Modification: If you are facing long-term reduction in your income, your servicer may agree to permanently modify one or more of the terms of your loan to make payments more manageable. Modifications can include lowering the interest rate, extending the term of the loan, or adding missed payments to the loan balance.

If your mortgage is through the Federal Housing Administration (FHA) or Veterans Administration (VA), you may have other alternatives. Contact the FHA www.fha.gov or VA www.homeloans.va.gov to discuss your options.

Communication with Your Loan Servicer

Prior to approaching your loan servicer with negotiations, make sure you are prepared with your records of income and expenses. You should also calculate the equity in your home by estimating the market value then subtracting the balance of your first and any second mortgage or home equity loan. Prepare to provide an answer to the following scenarios:
  • What are the reasons for falling behind in your mortgage payments? How have you tried to resolve the problem? Do you have any documentation?
  • Is your problem temporary, long-term, or permanent? Do foresee any changes in the short term, and in the long term? What other financial issues are you dealing with that are standing in the way of you getting back on track?
  • What is your goal? Do you want to stay in your home? If so, what kind of payment arrangement are you looking for?

In negotiations with your loan servicer, be sure to:

  • Keep detailed notes of all communications, including the date and time of contact, the method of contact (in person, by phone, email, fax, or postal mail), the name of the representative, and the outcome.
  • Follow any oral requests you make with a written request. Send the letter by certified mail, "return receipt requested", so you'll have record of what the servicer has received. Keep copies of all communications in an organized file.
  • Meet all of the deadlines the servicer gives you.
  • Stay in your home during the process. If you move out, you may not qualify for certain types of assistance. Renting your home automatically changes it to an investment property instead of a primary residence.

Consider Giving Up Your Home

If the above negotiation strategies aren't an option, there are still some ways to avoid foreclosure; however, you won't be able to keep your home.
  • Sell: If you cannot afford your mortgage payments, and it doesn't look like you will be able to in the near future, you may just need to sell your home. If the real estate market in your area is good, selling your home may provide the funds you need to pay off your current mortgage debt in full and even leave enough to pay other debts off as well. Your servicer might postpone foreclosure proceedings if you have put your home on the market or have a sales contract pending.
  • Short Sale: Your servicer may allow you sell the home yourself before the property is foreclosed on, and may agree to forgive any shortfall between the sale price and the mortgage balance. This approach avoids a damaging foreclosure entry on your credit report. You still may face a tax liability on the amount of debt forgiven. Consider consulting a financial advisor, accountant, or attorney for more information.
  • Deed in Lieu of Foreclosure: You voluntarily transfer your property title to the servicers (with the servicer's agreement) in exchange for cancellation of the remainder of your debt. Though you lose the home, a deed in lieu of foreclosure can be less damaging to your credit than a foreclosure. You will lose any equity in the property, and you may face an income tax liability on the amount of debt forgiven. A deed in lieu may not be an option for you if other loans or obligations are secured by the property on your home.

Housing and Credit Counseling

Trying to decide what to do can be confusing and frustrating. You don't have to go through this process alone. Counselors, who specialize in housing issues, can assess your situation, answer your questions, go over options, prioritize your debts, and help you prepare for negotiations with your loan servicer. Many of these services are free or low in cost. While some agencies limit their counseling services to homeowners with FHA mortgages, many others offer free help to any homeowner who is having trouble making mortgage payments. Call the local office of the U.S. Department of Housing and Urban Development www.hud.gov or the housing authority in your state, city, or county for help in finding a legitimate housing counseling agency nearby. Or consider contacting the NeighborWorks® Center for Foreclosure Solutions at 888-995-HOPE or www.nw.org. The Center is an initiative of NeighborWorks America.