HOW TO AVOID AND STOP A FORECLOSURE

Introduction

If you have fallen behind in your mortgage payments and believe you are in danger of foreclosure, don’t despair. There are ways to prevent the loss of your home and get your mortgage payments back on track.

The thing to keep in mind is that your bank doesn’t want to foreclose. What your bank wants is for you to pay your loan. The bank makes money by making loans and having the borrowers repay the loans successfully. If the bank takes the home in foreclosure, everyone loses, including the bank, which stands to lose 20 to 60 percent of the mortgage amount (depending on where you are in repaying the mortgage). If it can, then, the bank has an incentive to work with you in getting your payments back on track and avoiding foreclosure. It wants your money, not your house.

For this reason, the most important rule in avoiding foreclosure is to stay in contact with your lender, and the biggest mistake that homeowners make when facing foreclosure is to stop communicating. If your lender doesn’t hear from you, it’s likely to conclude that you aren’t interested in finding a solution or that you have decided no solution is possible, and in that case the only thing for the lender to do is to cut its losses by foreclosing on the loan.

The second rule is to be aware of how foreclosure operates and what you can do at each stage of the process to protect yourself and your family from losing your home.

What Is Foreclosure?

A mortgage loan extended to a homeowner is a secured loan. The central feature of a home loan is that the lender extends money to the homeowner and the homeowner buys a home with it, and repays the loan in monthly installments. But the loan is secured by the property so that, if the borrower becomes unable to repay the loan, the lender has the legal right to take possession of the property and resell it in order to recoup part of the loan’s cost.

The mortgage lender isn’t a real estate broker and isn’t in the home-selling business. It’s in the money-lending business. It’s not a good deal for the lender to foreclose on a home – but it’s better than simply being defaulted on without recourse.

Foreclosure is a legal process governed by state law, and as such the details vary from state to state. In most states, foreclosure proceedings can begin as soon as a single payment is late. That’s not very likely to happen, though; generally speaking lenders have a grace period in which to make up a late payment, sometimes with a penalty or late fee attached. As a rule, you have to be at least 30 days behind on your payments (meaning that two payments have been missed, not just one) before the lender becomes seriously concerned.

Even then, it’s unusual for a lender to initiate foreclosure immediately. Efforts to contact you and find out what’s wrong, and to collect payment to get the loan up to date, will be undertaken instead. A lot depends on state law governing foreclosure proceedings at this juncture. A lender doesn’t want to foreclose, but does want to preserve the option to do so, and that may require demanding that you make both overdue payments at once and even that the lender refuse any partial payments.

The lender will typically begin the foreclosure process itself only when a borrower is three months behind in his mortgage payments. At that point, the lender will either begin the process of selling the property itself at auction or file an action with the court to do so, depending on what state law requires. Once this is begun, you still have thirty days (usually) to bring the loan current and stop the foreclosure proceedings. Otherwise the home will be sold at auction and you will be evicted from the property which no longer belongs to you.

What to Do When You Can’t Make a Payment Temporarily

The first thing to do is to assess the reason why you can’t make your mortgage payment. Is this a temporary problem or is it something likely to be permanent? Temporary problems include loss of a job and unexpected medical or other emergencies. Another typical problem is an increase in interest on a variable-rate mortgage or difficulty making a balloon payment. If you have one of these problems or another that may be expected to be temporary, there are many things you can do to help you through the difficult times.

The first thing to do is to analyze your financial situation and see if, by making some adjustments or (to put it bluntly) stiffing some other creditors, you can make your mortgage payments during this difficult time after all. Can you get a short-term loan to cover your mortgage payments until you’re back on your feet? If you don’t pay your credit card bills for a few months, will that savings be enough to let you cover your mortgage? (Yes, this will hurt your credit rating, but you’ll keep your house. Which is more important?) Credit counseling may be helpful here, too, to see how your expenses can be reduced and your other obligations either consolidated or deferred. If you want to keep your home, that should be your first priority.

Contact Your Lender

If, after making this analysis, you know you’re going to miss a payment, contact your mortgage lender. Do this while your loan is still current, when you anticipate having difficulty making a payment but before it’s actually come due, if possible. Remember, your lender doesn’t want to foreclose, because it will lose money if it does. So you don’t need to worry that your lender is going to immediately start foreclosure proceedings if you let them know you’re going to be late with a payment (actually, your lender can’t legally do that, even if it wanted to). You have nothing to gain and everything to lose by hiding your situation from your mortgage lender. Since you’ve already analyzed your finances, you should have a clear idea of what you can pay towards your mortgage and when. Discuss this with your lender and see if a compromise can be worked out. If there’s a reasonable expectation that your problems will only last for a couple of months, odds are your lender will be willing to do this.

If you have a large lump sum of money coming in a few months and can show this to your lender, one option might be what’s called “forbearance.” This is simply a temporary agreement by the lender to let you off the hook for a temporary period in expectation of a lump-sum payment of the entire amount due (often with penalty payments or extra interest) at an agreed-upon date. Another possibility is a modification of your mortgage to lower the payments. There are many ways this can be done without having the lender lose money, for example by refinancing so as to lower the monthly payments but extend the repayment term. Finally, your lender (or another lender) may be able to extend you a short-term loan that will allow you to make your mortgage payments until your problems are resolved, often with delays in payments on that short-term loan.

Help May Be Available

The Federal Housing Authority (FHA) may be able to provide some assistance if your mortgage is FHA approved. The FHA provides counseling for borrowers facing foreclosure and will negotiate with your lender on your behalf. If you are a person in the U.S. military and have been called to active duty, your mortgage payments can be suspended during the time you’re in active service. (To qualify for this, you must have taken out the mortgage before you were placed on active duty. You must also show that your active duty prevents you from making your mortgage payments.)

What to Do if the Problem is Permanent

Most of the above is useful only if you are facing difficulties that are only a temporary problem, so that you will be unable to make your mortgage payments for a few months. What do you do if you face a permanent loss of income or increase in expenses? Suppose you have lost a job and there is no prospect of finding a new one in your former field, so that you are forced to take employment at a reduced salary. Suppose a loved one suffers a medical problem requiring expensive long-term care. Suppose you were counting on income from investments to make all or part of your expenses, and those investments go sour. In a situation like that, you may be facing the fact that your mortgage as it is currently configured is permanently unaffordable.

Is there anything you can do in that situation? Yes, there are several possibilities.

Once Again: Contact Your Lender

As always when faced with difficulties making your mortgage payments, the first thing you should do (after you have analyzed your financial difficulties and decided how to deal with them) is to contact your lender. Do this before you have missed a payment but after you know you are going to. Don’t wait for the lender to contact you. This shows your good faith and makes the lender more willing to work with you to avoid foreclosure.

In this case, you know that you aren’t going to be able to continue making your mortgage payments, so this is not a “bump in the road” situation as above. You have only two options. You can take action to permanently reduce your mortgage payments, or you can sell your home. You will need to discuss with your lender which of these you intend to do, and how you intend to go about it. Your lender will most likely be willing to work with you in terms of your monthly mortgage payments while you set about finding a permanent solution, but only if you have a sound and reasonable plan for doing so.

Refinancing

If you have enough equity in your home and if you could make your mortgage payments if they were just a little lower, you may be able to refinance your mortgage. This involves taking out a new mortgage loan and paying off the old one. The new loan would likely have lower monthly payments, at the cost of extending the payment schedule for longer into the future.

Your current lender may well be able to offer you reasonable terms for refinancing if you have good relations with them and if your credit is good, and also if you meet the requirements for doing so in terms of income, equity in the home, etc. Your lender may also be willing to restructure the loan so as to avoid foreclosure provided the lender’s interests are met.

Selling the Home

If you are in a situation where there is no way you are going to be able to make your mortgage payments even with refinancing, then the only realistic way to avoid foreclosure is to sell the home. Of course, this may be the most desirable option even if refinancing can work. Selling a home often takes time, especially when the housing market is down. You will need to contact your mortgage lender to work out an arrangement to avoid foreclosure while you finalize the sale.

What you will do most of the time if you sell the home is to repay the remaining mortgage balance in one lump sum. Sometimes the buyer assumes the existing mortgage obligation instead along with a payment of equity to the seller. Either way, the lender would be paid and would be able to avoid foreclosure. Sometimes, depending on laws, prevailing market conditions, and other considerations, a lender may be willing to accept less than the full loan amount in repayment if you sell the home promptly. This occurrence has become more common as the value of homes has dropped below mortgage amounts in the collapse of the housing bubble.

It can often be difficult to sell a home or to achieve as high a sale price in a “forced sale” situation such as having to sell a home to avoid foreclosure. For that reason among others, it’s crucial to stay in contact with your lender while you attempt to sell the home. Your lender is very likely to be willing to suspend mortgage payments while you pursue the sale and to work with you on retiring the mortgage afterward.

The Last Resort: Deed in Lieu of Foreclosure

If there is absolutely no way you can bring your mortgage loan current in a reasonable time, refinance your mortgage so as to reduce your payments to what you can afford, or sell your home in a timely manner for enough money to retire your mortgage, the last resort is to perform a deed in lieu of foreclosure. What this does is to sign your interest in the home over to your lender. The end result is exactly the same as in foreclosure, but the procedures under the law are bypassed and you simply jump to the conclusion by mutual agreement.

Why would you or the lender agree to this? After all, you would be losing your home either way, and your lender would be losing money (as lenders usually do in a foreclosure situation)? If you know for certain that there is no other way out, a deed in lieu of foreclosure does have some advantages. Foreclosure hurts your credit rating and ability to get a new mortgage loan, while deeding your property does not hurt your credit nearly as much or for as long. Also, if the lender accepts the deed and voluntarily closes the mortgage, this looks better on the lender’s records than having a loan go into default and being forced into foreclosure proceedings, which themselves also cost the lender money and time.

Second Mortgages

Having more than one mortgage on your home when you face an inability to pay one or both of these loans can present special difficulties. A second mortgage generally doesn’t carry a right of foreclosure as long as the first mortgage, which does, remains in force. This can tempt homeowners in difficulty into thinking that the second mortgage can be completely ignored while they negotiate with the holder of the primary mortgage. That’s absolutely untrue, especially when your lender enters into a forbearance agreement with you while you straighten out your circumstances.

The problem is that the forbearance agreement lowers the value of the first mortgage to your lender, making it more willing to sell – and the holder of the second mortgage may offer to buy the primary mortgage interest from your lender. If that happens, then your second mortgage holder will now hold your first mortgage as well and have a powerful incentive to foreclose as that is the only way it is likely to get timely payment of the second mortgage amount. This is one of the few situations where a lender is likely to start foreclosure proceedings as soon as it legally can. To avoid this, make certain you take your second mortgage into consideration when making your arrangements and don’t disregard it!

Conclusion

Foreclosure is a disaster for a homeowner, but it’s not good for the lender, either – it’s just better than completely losing out in the event of default. For that reason, a lender is usually willing to negotiate with a homeowner who is dealing in good faith. There are often ways to avoid foreclosure, and any homeowner faced with difficult financial circumstances should be aware of these options.

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