It seemed so simple when you bought the house. It was well within your budget. You didn’t have to worry about rent anymore. And you were building equity in a property that would someday help to fund your retirement. You were on Easy Street, or so you thought.

But then something happened. You lost your job via layoffs. Or you were demoted during cutbacks. You had a sudden illness that caused you to be away from work. Someone close to you had a serious illness or actually died. Your spouse wasn’t as faithful as you imagined, and now you’re going through a nasty divorce. Even though you could afford the house, your credit card bills, auto loans and other payments all mounted up at once. That adjustable rate mortgage you thought was so reasonable just ballooned and now you can’t meet your monthly payments. Or that heating and air conditioning system that checked out fine when you bought the house goes belly up, leaving you with a $10,000 bill to install a new one.

No Way Out?
The threat of foreclosure can happen to anyone, even the smartest home buyer who thought he or she had all the angles covered. So do you just give up and walk away from what you thought was your dream house? Do you incur the costs and damaged credit reputation? Is there any way out?

No legitimate homeowner wants to go into foreclosure. It’s a solution of the last resort. But when the dollars won’t stretch to every payment, you have to make choices.

The first method is to do a budget. See how much money is coming in and where you can cut. If you drive a fancy SUV with high payments and even higher fuel costs, see how much you could save by selling that and downsizing into a compact gas-sipper. No more restaurant meals. No health club memberships or vacations. Cut to the bone and see if the money left over will be enough to pay your mortgage.

If you have an adjustable rate mortgage, see if you can refinance. If you’ve been timely in your payments up until now and you have a relatively good credit rating, there are mortgages out there that can be acquired that will lower your monthly payment and keep the bank happy at the same time.

But all too often, the cataclysm that has landed the homeowner in this predicament makes it impossible for a person to meet the mortgage payment on the money that he or she is bringing in (or not bringing in).

If you’ve fallen behind by a couple of months, you probably have received several letters from your lender. DO NOT ignore these letters. It only gets worse the longer the non-payment goes on. If you choose to ignore the letters, you will be threatened with a “Notice of Default.”
 
Be aware that, like you, lenders do not want to foreclose either. But lenders will file a Notice of Default to protect their interests, if necessary.

If you know you are unlikely to meet your mortgage obligation, the very first thing you should do is call your lender. They’ve heard it all, so you need to put everything out on the table. Don’t be embarrassed or reluctant to discuss your personal situation. It’s no crime these days to be down on your luck, and you’ll need some to get out of this crisis.

Depending on your situation and circumstances, there are some options your lender might propose to you:

• Forbearance, or time to make up your payments. Remember, lenders don’t want to foreclose. It’s a hassle for them and reflects poorly against their institution. A bank might agree to wait before taking legal action against you and let you work out a repayment plan that is affordable for you.

• Debt forgiveness. So you’ve missed a payment or two. If you can agree on a way that will make you current, the lender might give you a break and waive your obligation. You may not have to pay it back. But don’t hold your breath; this rarely happens.

• Repayment plan. More likely a lender would be more amenable to let you spread out the missed payments over a longer term. Let’s say your payment is $1,200 a month, the lender might let you add $100 a month to each payment for a year until you are caught up.

• Note modification. If you have an adjustable-rate mortgage, the bank or mortgage company might freeze the interest rate before it increases or change the interest rate to a more manageable rate for you. Or they might change the terms of the loan, and extend the amortization period, or how long the loan is due.

• Refinance the loan. If you have some equity in your home and meet the lending guidelines, the bank might increase your loan balance to include the back payments and re-structure the loan. This might include a new interest rate and term of the loan.

• Partial claim. Some government loans (FHA, Fannie Mae, Freddie Mac) contain provisions that let borrowers who meet specific criteria apply for another loan, which will pay back the missed payments. It’s in the fine print, so you’ll have to read it closely.
Stopping Foreclosure

Once you’ve tried all the above steps, yet you’re still behind the eight-ball, your options decrease substantially. If the lender files a Notice of Default, you must begin to look for an exit strategy that makes sense for you. Once that notice is filed, lenders are less likely to work out repayment schedules.

After the notice is filed, you are given a specific time period to make the payments current, pay the costs of filing the foreclosure and stop the foreclosure, which will result in the reinstatement of your loan. But if you’ve reached this stage, only a lottery win can usually rescue a distressed homeowner.

Here are your options after the Notice of Default is filed:

• Selling your home. This is very much like a traditional sale of your home, the only difference being you probably won’t recoup any profit and you have a tight time frame. You should interview real estate agents to get an opinion of market value and average time on the market to sell your home. Since money is tight, you might be tempted to hire a discount broker, but remember, you need the exposure and marketing that full-service brokers offer at this point. But compare both to determine which best meets your needs and time frame.

• Consider a short sale. Most likely, your home is worth less than the amount you owe in this market. If this is the case, you should weight a short sale. This will affect your credit but not as adversely as a foreclosure. You or your agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale. This is called a pre-foreclosure redeemed.

• Agree to a “Deed-in-Lieu of Foreclosure.” This solution deeds the home back to the lender. The homeowner gives the lender a properly prepared and notarized deed, and the lender forgives the mortgage, effectively canceling the foreclosure action. The bad news is that this deed-in-lieu-of-foreclosure affects your credit the same as a foreclosure.

At one time, lenders tended to allow owners to stay in the house until they found a place to move, but damage caused by disgruntled homeowners makes that unlikely. However, if you have had a professional relationship with your lender and tried everything to work something out, they might make an exception.

Owners in default can negotiate the right to retain occupancy, arguing that if the lender followed through on the foreclosure, an owner would still enjoy the right of possession during that procedure.

NEXT MONTH:
How to profit from foreclosures.    

By Patrick Roberts

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