During tough economic times, many homeowners find that they are unable to make their monthly mortgage payments. There's a good chance that you or somebody you know has been threatened by the realistic possibility of foreclosure. There are many reasons why a homeowner may fall behind on the mortgage payments, some of which are listed below:
- Loss of job
- Decrease in income
- Divorce or separation
- Unexpected medical issues
- Increase in mortgage payment due to adjustable rate loan or increase in escrow payments
- Poor money management
So, what is a homeowner to do if a change in his or her financial situation affects the homeowner's ability to pay the mortgage? The first thing to remember, and perhaps most important, is to take action immediately. By starting quickly, you can improve your odds of avoiding foreclosure simply by giving yourself and the mortgage company more time to act.
The first step is to prepare yourself to call your lender. Your lender will want to know why you can no longer afford your mortgage payments. Be ready to provide a detailed explanation of your financial hardship. Your lender will discuss your options with you, and apprise you of the steps in the process going forward. If you have any questions or are confused about any of the options, don't be afraid to ask questions. The options discussed may include:
- Forbearance - a temporary arrangement that can reduce or suspend mortgage payments, with a promise to repay at some point in the future
- Modification - a long-term adjustment in the mortgage payment that is accomplished through a reduced interest rate and/or extended repayment term, and oftentimes also involves capitalization of a delinquent balance
- Pre-foreclosure sale - a short sale or quick sale of the home if it is deemed to be unaffordable, preferable to losing the home to foreclosure due to reduced impact on credit and reduced financial loss
Deed-in-lieu - an arrangement in which the homeowner deeds a property back to the lender, once again offers a reduced impact on the consumer's credit and can save the consumer the embarrassment and high legal costs associated with foreclosure
When you call your lender, they will likely direct you to fill out a hardship packet so that they can review your options. This paperwork may be sent to you via mail or a package delivery service, or it may be available to download online. Once you receive it, fill it out as completely and accurately as possible. Your lender will likely ask for information about your monthly expenses. Be honest and accurate when providing these figures. You don't want to understate your expenses, or else the mortgage company may offer you a workout option that is not affordable for you. Likewise, it's just as bad to overstate your expenses, for it may lead the mortgage company to the conclusion that they won't be able to come up with an affordable option for you, and that you'll have to leave your home. Make sure that you return your hardship packet and all requested documents (proof of income, hardship letter, etc.) as soon as possible. Follow up with your lender to confirm receipt.
From here, the process can become very frustrating. Depending on the volume of homeowners seeking help, it may take months before you hear anything. During this time, follow up with your lender on a weekly basis to make sure your paperwork is being processed. Another positive step to take at this time is to do an honest assessment of your current financial situation. Maybe you fell behind on your mortgage after something changed, but was there another underlying issue that would have eventually caused you to struggle? Perhaps you didn't miss a payment until you lost your job, but all along you were using credit to live beyond your means. It is important to cure the cause of the hardship so that you can avoid running into trouble affording your home in the future. It's also important to ask yourself the following question: can I afford to keep this home? You may find it helpful to have a third party complete an unbiased assessment of your financial situation. You can speak to a HUD-certified housing counselor, free of charge, through a number of non-profit counseling agencies. For more information on housing counseling, ask your lender to refer you to a non-profit counseling agency.
After reviewing your information, your lender will offer a workout option to you. If you want to save your home, hopefully you will be offered a special forbearance, a loan modification, or perhaps another retention option. If you are not offered any options to help you save your home, don't give up! Perhaps you will have a positive change in your finances in the near future. If this happens, let your lender know so that they can take another look at your options. Also, keep up to date on any programs that may be introduced to help you save your home. Check with government agencies to learn about any recent changes.
At the same time, don't let the situation go on for too long before taking any action. If foreclosure is staring you in the face and it doesn't look like you can save your home, contact a real estate professional in regards to putting your home on the market. If that fails, consider working with your lender to execute a deed-in-lieu. You don't want to wait too long and let the mortgage company take your home through a foreclosure sale.
By following this advice, hopefully you will be able to avoid foreclosure, and maybe even retain ownership of your home. The mortgage companies have programs that can help you, and it's important that you are proactive and take advantage of these programs.