A foreclosure is an action taken by a mortgage lender to take posession of a property when the homeowner has defaulted on the mortgage. The laws governing foreclosures vary from state to state, so if you find yourself falling behind on your mortgage, or foresee a problem with making your payments in the future, the faster you act, the better chance you have to save your home.
It's no secret that foreclosures have been a bane in our society for quite some time now. Although trending downward over recent quarters, the threat of foreclosure is still a very real problem for many Americans. Since a foreclosure can impact the homeowner's credit report for seven years, avoiding foreclosure is undoubtedly in their best interest - even if they don't want to keep the home.
There are a great many reasons why homeowners find themselves threatened with foreclosure. Some common reasons are:
- Job loss
- Unexpected maintenance expenses
- Inability to properly budget income and control spending.
- Sub-prime mortgage loans/variable-interest rates
- Medical expenses
When someone realizes that they are in danger of foreclosure, the earlier they act, the better chance they'll have of avoiding it. If you're behind on your payments, or even if you foresee a problem with making payments in the future, it's vital that you communicate with your lender as soon as possible. This is very important, since it's usually easier to make a payment arrangement than it is to reverse an active foreclosure. Plus, many lenders, as well as federal and state governments, have hardship provisions for homeowners in financial distress. In the end, it almost always costs the lender more to foreclose on your home than it would to make an arrangement with you and help you to avoid it.
How do I know if I'm at risk for foreclosure?
You don't have to be seriously delinquent on your mortgage payments to be considered "at risk" for foreclosure. If you're having difficulty making your payments every month, even if you haven't missed one yet, you can still consider yourself "at risk". For example, if you're living paycheck to paycheck and have very little discretionary income at the end of the month, you could be one extra expense or overtime cut away from missing a mortgage payment. Just barely scraping by every month could turn into a problem that's much harder to get out of at missed payment number four than it would have been earlier on in the delinquency. Foreclosure is something that, while it should be prevented altogether, can be avoided even when you're close to losing your home.
What can I do to save my home from foreclosure?
- They may look like the enemy at this point, but honestly, your lender usually prefers NOT to foreclose on your home. In most cases, it will cost the lender more money to foreclose on your home then it would to help you develop a workout plan to keep it. It's possible that, if you explain to your lender what your financial situation is, and express your desire to pay them back, they will be willing to work with you on a new payment plan instead of foreclosing. In fact, most companies have departments specifically established to help struggling homeowners. You may be eligible for a mortgage modification which could result in a reduction of your monthly payment, making it easier for you to maintain on-time payments. Click here to learn more about loan modifications.
- Talking to a housing counselor will help you develop ways to manage your debt and figure out a way to move your spending around so your mortgage payments are easier to handle.Click to learn more about our housing counseling services.
- Making Home Affordable Program (MHA). This program can allow you to lower monthly payments and find loans that are more stable at a lower rate. Programs are available for employed homeowners, unemployed homeowners and those homeowners who happen to owe more money than their home is worth. Click to learn more about the Making Home Affordable program.
- Home Affordable Modification Program (HAMP) - Monthly payments are reduced to no more than 31% of your net monthly income. Not all lenders support this program and there are various requirements that need to be met before you can qualify for this program. Click here to learn more about the Home Affordable Modification Program (HAMP).
How will a foreclosure affect my credit score?
A foreclosure remains on your credit report for 7 years after the fact, but it may not affect your ability to obtain credit for that long. In fact, MyFICO.com writes that, "If you keep all of your other credit obligations in good standing, there's a good chance that your FICO score could begin to rebound in just 2 years. Try to pay your auto loans, credit cards and any other credit obligations on time to limit the effect of this foreclosure." This means that, while the foreclosure will remain on your credit report for 7 years, you're not necessarily going to be in trouble financially for the rest of your life. Foreclosures are not something that anyone wants to experience, but please know that you can recover from one if you work hard at ensuring all of your other obligations are met.
How do I protect myself from being taken advantage of?
There are companies out there that do their best to take advantage of your struggles and try to get you to pay them for their services without ever planning on following through with them. Keep in mind that HUD-approved housing counseling services are typically free, so be wary of any company contacting you that charges a fee. The Federal Trade Commission (FTC) outlines the most popular tactics:
- "Phantom Help" - In this scenario, the culprit can claim to be an attorney or law firm representative. These people offer to negotiate a deal with your lender to either reduce payments or save your home. For a fee, these thieves will collect what they want, and vanish.
- The "Forensic Audit" - Again, for a fee, "auditors" offer to have an expert (sometimes an attorney) review all of your documents in regard to your mortgage to see if your lender was compliant with the law. You are told you can use this report to avoid a foreclosure on your home, speed up the loan modification process, reduce your debt, or cancel your loan entirely. In reality, there is absolutely no evidence that shows these types of audits will help you get a modification or relief in any way.
- Rent-to-Buy Schemes - This scheme involves the promise of being able to rent your home until you can afford to buy it back at another time. You are told that, by surrendering your title, you are allowing a borrower with a better credit rating get new financing in order to prevent the loss of the home. These con artists make the terms so expensive, however, that you will not be able to buy your home back and will ultimately lose it.
- Bait and Switch - Hidden in a stack of papers for a "loan to make your mortgage current" is a secret document that has you unknowingly surrendering the title of your home.
The Mortgage Assistance Relief Services rule (MARS) has made it so that it is now illegal for any company to collect fees until an offer of relief has been made and accepted. What does this mean? You don't have to pay until the company lives up to their promise of getting you results. But remember, and we can't stress this enough, there are plenty of reputable non-profit counseling agencies, approved by HUD, that will provide you with best help at no-cost.
Refinance - The altering of the monthly payments owed on the loan, either by changing the loan's interest rate or by altering the term to maturity of the loan.
Forbearance - An agreement to suspend or reduce normal monthly payments for a fixed period of time.
Loan Modification - A written agreement that permanently changes one or more of the original terms of the loan.
Repayment Plan - A written agreement with the lender or servicer where the homeowners agree to cure their delinquency by adding an additional amount to their monthly mortgage payment until the loan becomes current.
Partial or Advance Claim - An investor or mortgage insurer agrees to advance funds in an amount necessary to reinstate a borrower's loan.
Full Sale of the Property - Putting the property on the market (with or without a realtor) to sell the home for more than the amount owed.
Short Sale - The sale of a property for less than the amount necessary to pay off the loan in full.
Deed in Lieu of Foreclosure - A borrower voluntarily conveys the title of the home and property to the lender in exchange for a discharge of the delinquent debt.
Reverse Mortgage - Seniors with a significant amount of equity in their homes may qualify for a reverse mortgage. In this process the lender makes payments to the consumer that draw on the equity in the home.
Bankruptcy - A legal process that happens when a person or business is unable to repay outstanding debts. This process begins with a petition filed by the debtor or on behalf of creditors. Assets (belongings, home, car, etc.) are used to repay a portion of this debt. After filing for bankruptcy and repaying the debt with one's assets, the debtor is then relieved of their debts.