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:
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.
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.
You're not sure how you missed a payment, but you did, and now you're not quite sure you can make up those payments before your home is in jeopardy. It may seem like there's no help, but there is. You have several options when you're facing foreclosure that could help prevent it, or at least guide you through it to avoid additional problems.
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.
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:
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.
Note: If your mortgage company has already begun foreclosure proceedings, it's wise to hire an attorney to make sure you're not giving up any rights under your state's laws.