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Foreclosures |
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What to Do if It Happens to You
By Megan L. Fowler, MSJ |
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Foreclosure is one of those “it'll never happen to me” phrases, but poor financial planning and living beyond your means, as more and more couples are doing, can lead to foreclosure before you know it.
For most, your home is your single largest investment. It's where your children are learning to walk, where you carry on your family's holiday traditions and a place where you've invested a hefty amount of money. |
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Fortunately for homeowners and buyers, interest rates have remained at an all-time low and refinancing has offered new beginnings for those whose mortgage payments were becoming almost too much to handle. However, despite a favorable interest environment, there are still those who find themselves in an unavoidable foreclosure situation.
“There is a stigma placed on foreclosures,” says Sandy Cutts, spokesperson for Fannie Mae, a government agency that works to make homeownership attainable. “It is not in the best interest [of the lender] to swoop down like a vulture and repossess the property. It costs a lot of money to cultivate a borrower, and the lender will [usually do everything to] help the [homeowner] work it out if possible.” There are steps you can take and solutions available, she adds. “I always advise people that at the first sign of financial trouble, contact your [bank]. Be forthright and honest.” |
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If you find yourself in a difficult financial situation and realize you can no longer afford your home, there are options available. If the thought of foreclosure has crossed your mind, read on. We've spoken to several industry experts on the dos and don'ts of home ownership, financial readiness and how to deal with the emotional stress your entire family faces when losing your home becomes a reality.
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Foreclosure Is Unavoidable – Now What?
If foreclosure actions have already begun and there is no hope of keeping your home, Andrew Housser, co-CEO of Freedom Financial Network , LLC in San Mateo, Calif., a company that provides comprehensive consumer debt resolution services, offers two action steps you should initially take: |
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- Contact a reputable foreclosure assistance organization . If you have already fallen behind on your mortgage payments and are facing foreclosure actions from your lender, it would be wise to contact a foreclosure counseling organization right away. Depending on the state in which you live, foreclosure proceedings can move quickly. The earlier you start negotiating with your lender, the better chance of finding a solution to save your home. Make sure any organization you do business with has a strong Better Business Bureau (BBB) rating before entering into any agreement with them. The options available to you are similar to the following: forbearance, loan modification, deed in lieu of home sale. At this stage of the foreclosure process, refinancing will probably not be an option because of the delinquencies on your payments.
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- Watch out for equity skimmers . If your house is facing foreclosure, you will probably receive solicitations from several people who are looking to “help” you prevent foreclosure by offering to sell your home for you, or by taking ownership of your home. In most cases, these solicitations are scams trying to take advantage of people in difficult situations. The perpetrators are trying to take the equity you have built up in your home right out from under you.
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Dealing With the Stress of Losing Your Home
Foreclosure is not a situation to be taken lightly, and hiding it from your spouse or family members is not a good idea. “Often I work with couples where one spouse handles all the money and the other really has nothing to do with it,” says Doug Charney, president of The Charney Investment Group in Harrisburg, Penn. “That is not a good way to go.” You end up with one spouse that has no clue of what's going on and the other is hiding it or afraid to discuss it with their partner, he says. All of a sudden there is a problem and that will cause trouble.
“Once it has come to the fact that you can't afford to be in the home, it is better to get it over with right away and do it in a way that won't impact your credit report as much,” says Housser. “In the long term it is going to be for the best to get you into a home you can afford for the next 30 years.” You can actually avoid foreclosure if you give your house back to the lender, or sell it yourself.
“Take comfort in knowing the lender does not want to take your home,” says Megan Smith, with First Lenders Data, Inc., an Austin, Texas-based provider of settlement service solutions to the mortgage lending industry. “Your lender is not the enemy.” Let them know of your stress level and let them know you are willing to work it out at all costs, she continues. It is better to deal with it before it snowballs. |
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Here are some tips from Smith on ways to lower your stress in times of financial hardship:
- If possible make your payments on or before the due date.
- If you are unable to meet your original loan terms, contact your lender immediately.
- Always keep the lines of communication open with the lender – do not avoid phone calls and ignore letters.
- Be prepared to provide whatever information is necessary to the lender to avoid losing your home.
- Missed payments and lack of communication from homeowners causes lenders to foreclose.
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Why Foreclosure Doesn't Have to Be the End
The most important thing homeowners should know is when you get a missed payment notice from your lender it is not the end, says Housser. “Every state has different laws, and you have time and you have options.” This should not, however, cause a sense of complacency. The sky is not falling but there are steps you can take to make sure you start things right away.
The following are options offered by Housser you can consider if you are falling behind on your mortgage payments and want to avoid foreclosure proceedings:
- Enter into a forbearance agreement.. If you or your spouse has suffered a temporary hardship, your lender may be willing to engage in a forbearance agreement with you. A forbearance agreement allows for a temporary change, such as lowering – or in some cases eliminating – your payments for a specified period of time. In order to agree to this, your lender must be convinced that your hardship is temporary and that you will be able to get back on track in the future. Otherwise, they may view forbearance as merely delaying the inevitable.
- Consider loan modification . A loan modification is similar to a forbearance agreement in that it changes the loan payments. The difference with a loan modification is that it seeks a permanent change to the loan, such as lowering the payment and extending the term of the loan, or incorporating delinquent back payments (if any) into the future payments.
- Obtain a “deed in lieu” of foreclosure . A “deed in lieu” allows the borrower to offer the title or deed of the property back to the mortgage holder in order to prevent a foreclosure on the home. You are simply giving the property back to the lender in order to avoid foreclosure.
- Sell your home . Like a deed in lieu, selling your home may not be ideal, but it is another way to avoid foreclosure proceedings on your house and pay back your lender.
- Refinance the loan . It may be possible to refinance your mortgage for a lower interest rate and/or lower monthly payment (this is much different than refinancing to take cash out to pay off credit cards). However, if you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment. But it is worth calling your lender to see what your options are.
“If you are looking for assistance in negotiating a forbearance, deed in lieu or loan modification with your lender, contact a reputable foreclosure assistance organization that has a good rating with the BBB,” Housser says. “If a solution is possible, a good foreclosure assistance organization will be able to use its foreclosure expertise and relationships with lenders to come up with a solution that works for both you and your lender.”
Financial Tips, How to Avoid Foreclosure From the Get Go
When considering the purchase of a home, make sure you have sufficient funds to qualify for a good loan and have three to six months' worth of mortgage payments in the bank. “Do a good budgeting exercise up front, watch out for adjustable rate mortgages and leave yourself some breathing room,” says Charney. And take a good look at your lifestyle to make sure you aren't living beyond your means.
Your first house shouldn't be your dream house; it should be a starter house, he adds. “You will own three to four homes in your life and each one should be a step up from the one before,” he says. “It should be in an area that you think will go up in value, and you should plan on staying there for five years.” Ask yourself if you really need top appliances, or to put in a pool. “Stop spending on things that are not a necessity and get back to a budget.”
When buying or refinancing a home, Housser suggests the following:
- Create a budget and don't stretch yourself too far . Unexpected things can and do happen to millions of Americans each year – reduced income, medical expenses, car accident, divorce. Build a detailed budget of your income and expenses. Determine what are essential expenses (heat, water, food, gas) and what are unessential (entertainment, travel). Make sure you have some breathing room so that if something unplanned does occur, you will be able to weather the downturn for a few months and keep your home.
- Be careful when considering adjustable rate mortgages (ARMs) . More people than ever have been entering into ARMs in order to buy homes that are more expensive than they can afford. Interest rates on ARMs start off considerably lower than those on fixed-rate loans, and can lure you into a home beyond your means. Unfortunately, these ARMs typically carry the low introductory rate for only three to five years. After this time period expires, the interest rates, and thus payments, can jump significantly. If you can barely afford the payment on your ARM, then you are asking for trouble in a few years. Adjustable rate mortgages can be useful, however, if you are planning to move within the three- to five-year period, before the rates start adjusting. But if this is not the case, use caution.
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Beware of the risk involved in refinancing your home to pay off credit card or other unsecured debt . All a refinance is really doing is transferring debt from one place to another. Once you refinance your home to pay down unsecured (credit card) debt, you have just moved an unsecured debt to a secured debt and have put your home at risk of foreclosure if you are unable to pay. If you are considering using home equity to pay off unsecured debts, be confident that you will be able to keep up with the higher payments on your home loan going forward.
Improving Your Credit Score
After foreclosure it is important to look at your credit report and credit score, says Smith. While a foreclosure will certainly hurt your credit, there are ways to improve it over time. Here are some ways Smith says you can rebuild your credit: |
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Manage your current credit accounts and keep your balances at comfortable limits. If you are "maxed" out on every credit card this reflects poorly on your credit management skills. You are more than likely over extended and at a higher risk to miss a payment.
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Be aware of your credit history and notify the credit agency if something is incorrect.
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Consider opening new accounts and paying them off on time to show creditors your ability to manage your credit. Only positive credit management and time can improve your score after a foreclosure, but it can be done.
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If you are having trouble making your mortgage payment, Fannie Mae has several programs available to assist you at www.fanniemae.com . |
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Want to see more?
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About the Author: Megan L. Fowler
is a freelance business journalist living in Fairbanks,
Alaska. She frequently covers national real estate trends
and financial planning issues.
Click
here to go to Freedom Debt Relief's website |
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