Anytime a homeowner runs into financial trouble dire consequences can enter into the equation. That is especially true when it comes to foreclosure of the home that was used to secure the debt owed to the lender who is now foreclosing to get title to the property back.
However, there are several methods that homeowners in financial distress can use to stop foreclosure fast. Some methods require money, while others require agreement to forgo money by the lender or through the court system.
"Foreclosure is a terrible event," says James J. Saccacio, chief executive officer at RealtyTrac, the nation's leading online foreclosure marketplace. "The tragedy is that many of foreclosures can actually be stopped. How? You have to know how the game is played."
Here's 5 steps to take that can help stop the foreclosure process dead in its tracks:
Step 1: Don't Panic.
Most households have a surprising array of assets that can be used to make payments and delay foreclosure. Unemployment insurance, disability insurance and savings are each potential cash sources. Household budgets can be slashed. Big, expensive cars can be traded in for cash. Retirement funds are often available — but be aware that withdrawals may result in penalties and additional income taxes.
Saccacio says borrowers should not forget about friends, family, co-workers, religious congregations and community groups. "You may be surprised by the number of people and groups who will lend a hand when times are tough." People are willing to give foreclosure assistance.
Step 2: Deal With Late and Missed Payments.
If problems cannot be delayed or deferred, and if mortgage payments will be late or unpaid, then you MUST contact the lender as soon as possible.
At this point your goal is to help the lender create a "workout" agreement that effectively modifies your mortgage so that the foreclosure can be stopped before going to completion.
Step 3: Look at Workout Options.
Once you enter into discussions with a lender or a "servicer" — the company that services the loan for an investor — any number of options are open. While lenders are typically NOT required to modify loan arrangements, many will. The usual choices include:
- A deed in lieu of foreclosure: In this situation the lender accepts the return of your title. "But be aware that the lender may not have to accept your title," says Saccacio. "Also, in many states a lender may sue for any loss, ding your credit report and report any uncollected loss to the IRS as taxable income to you."
- Claim advance: If you bought with less than 20 percent down then either the loan is self-insured by the lender or you have private mortgage insurance (PMI). In some cases PMI companies will provide a cash advance to bring the loan current — money which is sometimes interest free and need not be repaid for several years.
- Disasters: Most lenders, but not all, will provide substantial relief in the face of hurricanes, earthquakes and other terrible events. Typical measures include a suspension of late fees, no late payment reports to credit bureaus, a pause in foreclosure actions and modified payment schedules. To get such benefits you must contact the lender as soon as possible after the disaster.
- FHA loans: If you financed with a loan guaranteed by the Federal Housing Administration, call 1-800-569-4287 or 1-800-877-8339 (TDD) to reach a HUD-approved housing counseling agency for assistance and advice.
- Forbearance: This is a temporary change in mortgage terms, such as the right to skip a payment or make smaller payments for a year or less.
- Modification: "This option should be considered when the borrower experiences difficulty making regular mortgage payments as a result of a permanent or long-term financial hardship," says Liz Urquhart with AIG United Guaranty, a leading private mortgage insurance company. "Reducing an above-market interest rate to a market rate and/or by extending the original terms of the note may enable the borrower to continue making payments. Permanent interest rate reductions appeal most to borrowers, but even a temporary rate reduction of one to three years can provide substantial help."
- Private mortgage insurers. Mortgage insurance companies typically require lenders to begin foreclosure proceedings once a delinquency reaches 150 days or when a sixth missed payment is due. However, such requirements may be waived in areas impacted by natural disasters and for other reasons.
- Re-amortization: In this case your missed payment is added to the loan balance. This brings your account current. However, says Saccacio, "since your debt has increased, future monthly payments may be larger unless the lender agrees to lengthen the loan term."
- Refunding. If you have a loan backed by the Department of Veterans Affairs, the VA may buy the loan from your lender and take over the servicing. If you have the ability to make mortgage payments, but your loan holder has decided it cannot extend further forbearance or a repayment plan, you may qualify for refunding, according to the VA.
- Reinstatement: Imagine you missed two or three monthly payments. With a reinstatement, or what is also known as a "temporary indulgence," you bring your loan current, pay late fees and other costs, and the loan continues as before.
- Repayment plans: Say you must miss a payment and that each payment is $1,000. With a repayment plan you might pay $1,075 a month until the missing money is repaid.
- Short sale: An arrangement where the lender accepts less than the mortgage debt in satisfaction for the entire loan amount. Also called a "compromise agreement" with VA loans. Be cautious: Saccacio says in some instances money not repaid may be regarded as taxable income. Also, lenders in some cases may sue to recover any shortfall.
Step 4: Refinance the Loan.
Since 2001 millions of loans with new formats have been issued, permitting low monthly payments for the first several years of the loan term and then much higher monthly payments thereafter.
"If you have an option ARM, an interest-only mortgage or a negative amortization product and can't make the required monthly payments you can lose your home," says Saccacio, who also pointed out that in some cases monthly costs for principal and interest can more than double when the loan resets at a higher rate.
In such situations, Saccacio says switching to a mortgage with monthly costs that are higher than today but far lower than next year or the year after with current financing is a smart lending choice.
If you have a loan where soaring payments are a certainty, don't wait to refinance. Do it now while you have a strong credit profile and no missed payments.
Step 5: Sell the Property.
In some situations there is no workout or refinancing option which can save a property. If a job is lost, medical payments are overwhelming, or mortgage payments are rising to the point of bankruptcy the only plausible choice may be to sell the property.
"You have to be realistic," says Saccacio. "If the situation is headed downhill, if the situation is worse every month, you have to protect your interests and sell the property. This is a hard, difficult choice, but if you sell before foreclosure looms you'll get a better price for the property and you'll preserve your credit standing."
Most importantly, remember that there still are options, but you have to act quickly. Also, never rule out seeking out foreclosure assistance.
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