No one who buys a home intends to miss any mortgage payments. But unexpected life circumstances like loss of a job, death or divorce can quickly stymie the best of intentions.
Consequently, homeowners can't always prevent defaulting on their payments. What's important is how a homeowner in default chooses to respond to their predicament.
Some homeowners respond with inaction. They may acknowledge their default is a problem, but they don't act quickly to resolve the problem. Either they're in denial of the fact that they could lose their home or they're paralyzed by fear of losing their home. As a result, they don't pro-actively seek out the consequences of their missed mortgage payments and what options are available to them. If they do finally decide to act, it may be too late to avoid losing the property at a public foreclosure sale, which the foreclosing lender will conduct to recover the amount owed.
"When people go into default, their first option is to do whatever is necessary stop the default early in the process," said T.J. Marrs, national real estate author, speaker and success coach. "Most home sellers procrastinate and fail to take action early."
Other homeowners overreact. They fatalistically equate missed mortgage payments with losing their right to own a home and look for the quickest way to escape the situation without considering all the options. These homeowners are more likely to fall prey to scam artists who take advantage of their knee-jerk response to the default. In the worst-case scenario, a homeowner could lose the home but still be held responsible for paying off the defaulted loan.
Both of these responses are extreme examples of natural human reactions to a looming foreclosure. But neither of the responses is ideal or helpful to homeowners in default. Instead, homeowners need to adopt a measured response in which they take into consideration all the options available and act decisively before they lose their home.
"People need to begin making some sound decisions about what to do while they still have some options left," Marrs said.
The following guidelines epitomize a sensible response to stop foreclosure.
Contact Your Lender
Once the due date for your mortgage payment has come and gone, it's only a matter of time before your lender knows you're in default. But don't wait for them to contact you; act preemptively and call them right away. If you leave it up to them, they may not end up contacting you for several months – when it will be much harder to resolve the situation.
When you contact the lender, simply let them know your situation and ask what (if any) suggestions they have. Lenders deal with defaulted customers every day, so they often can provide solid advice. And most lenders aren't eager to expend the money and time it takes to foreclose on a defaulted homeowner, so they're open to other alternatives.
"Don't be afraid to communicate with your lender. If an agreement is made with them, stick to it," Marrs said.
If you reach an agreement with the lender, make sure they provide it in writing so that you're protected if they don't live up to their end of the agreement. And don't rely solely on the lender to act in your best interest. Before you sign anything, have it reviewed by a real estate attorney or local housing counseling agency approved by the U. S. Department of Housing and Urban Development. Visit www.hud.gov or call 800.569.4287 to find a local HUD-approved housing counseling agency.
Know the Deadlines
If you default on your loan and don't work out a plan of resolution with your lender, the lender will take the necessary steps to schedule a public foreclosure auction of your property. In some states the countdown to the auction is less than a month; in other states it is more than a year. In either case it's critical that you understand exactly how much time you have before you lose your home. A tangible deadline will help you set goals and take control of the situation.
"As an investor, the most common mistake I see people make is to wait until it is too late," Marrs said. "The closer the auction, the fewer the options."
Although most states require that the foreclosing lender rigorously attempt to notify the owner of any public foreclosure sale, you shouldn't rely solely on them to do that. When you contact the lender, ask them if and when a public foreclosure sale has been scheduled and up to what date you can stop the sale. Also ask them what you need to do to stop the sale.
The public foreclosure sale is the ultimate deadline, but there are other deadlines incorporated into the foreclosure process that are important. In states with foreclosure proceedings conducted through the courts, homeowners may be asked to appear in court during the pre-foreclosure process. At those court proceedings, a judge will decide if and when a public foreclosure sale will occur.
If you haven't been able to work out an agreement with the lender beforehand, it's crucial that you and an attorney are present at any court proceedings so that you're aware of what is happening and can represent your interests to the court.
Consult RealtyTrac's State Foreclosure Laws Summaries to find out more about the deadlines in your state.
Consider Your Alternatives
Although the options are limited, homeowners in default have several viable options to stop the foreclosure process. Not all of these options will work for every homeowner, but all homeowners should consider the advantages and disadvantages of each option and determine which is best for them.
Balance your budget
The core issue forcing homeowners into default is a lack of cash available to pay the mortgage. There are two ways to obtain more cash for the mortgage payment: spend less in other areas or find a way to increase monthly income. Even if you think you've already considered and pursued these options, it's important to take an honest and disciplined look at your budget to double check for any areas of improvement.
Because money is so tight, most homeowners in default aren't living lavishly or spending money frivolously. But you should go beyond that and carefully document your family's everyday spending over the course of a week or two. You may find additional areas that can be cut. In addition, make a list of all your monthly bills and prioritize them. If some of the bills on that list are for luxury products or services, you should seriously consider discontinuing them.
"Look at other assets which could be liquidated to keep the mortgage payments current. Late mortgage payments will negatively affect credit more than just about anything," Marrs said. "Let your car payments go behind before the mortgage is left unpaid."
On the flip side, look at alternative sources of income. Many people fall into default on their mortgage due to the loss of a job. If you're capable of working, consider finding a temporary job or two – even if you're overqualified and the jobs don't pay well – to cover some of your expenses while you're looking for long-term, higher paying employment.
You could also look for a short-term source of income, such as a credit card, friend or relative to pay back payments and fees. But do this only if you have a good chance to pay that borrowed money back quickly and you're in a position to stay up-to-date on your mortgage payments going forward, according to Marrs.
"I'm not suggesting rob Peter to pay Paul. Only do this if the reason which caused one to get behind has been essentially rectified," he said. "For example, the homeowner lost a job a few months back and is now back to work, but is too far behind to catch up all at once."
All your spending cuts and temporary income sources may not be enough in the face of the devastating circumstances that usually cause foreclosure. If that's the case, you need to appeal to your lender to provide some relief in the form of a restructured payment plan.
Each lender deals differently with defaulted homeowners, but some will offer alternatives that lower your regular monthly payments and allow you to pay back any defaulted amount over time. Remember, it costs the lender thousands of dollars to foreclose on your property, so you may have some wiggle room in negotiating restructured payments with them.
"In some rare instances one might work out a forbearance agreement, whereby the defaulting homeowner pays the bank some money now, and then pays the back payment over the next few months," Marrs said.
Once again, get any restructured payment agreement in writing from the lender. And read it carefully so that you clearly understand the terms of the agreement and the consequences if you don't abide by the terms.
You might save even more on your monthly payments by refinancing or taking out a second mortgage. Shop around for the best loan options. Depending on the balance and length of term, you may be able to realize much lower monthly payments through a refinancing.
"The more equity you have the easier it will be getting the loan or possibly even a second mortgage," Marrs said.
Ask your own lender first if they would be willing to refinance the loan. They might have special offers for current customers. Compare the terms they offer to other lenders. If you use another lender, make sure all the paperwork will be done in time to stop the foreclosure sale. The foreclosing lender may be willing to postpone the foreclosure sale if you demonstrate that you are taking steps to resolve the situation.
Sell the property
This probably isn't your first choice, but if you're not able to stop the public foreclosure auction any other way, it's a choice you should make as long as you don't owe more than what the property will sell for on the market. By selling pre-foreclosure, you'll be able to keep the foreclosure off your credit history and walk away with some money to show for your equity.
"If you let things get too far behind, it will cost more in terms of higher interest rates and negative credit ratings than what you might be saving by holding on to bad deal," Marrs said.
Inform your lender that you are listing the property for sale to pay off the amount owed to them. Ask the lender if they will postpone the foreclosure sale to give you enough time to sell the property for a reasonable price. Even if the sale is postponed, you'll probably be under a time crunch to sell the property. That's why it's important to make this decision early on in the process.
"If the auction date is getting very close, one may consider selling to an investor who can quickly close and clear up the primary problems, or hire a realtor if they can demonstrate they can sell quickly," Marrs said, adding that some investors may allow homeowners to continue to live in the property and lease it after the property is sold.
"One may consider working with a reputable investor, whereby they purchase property, then lease property back to you with an option to buy," he said. "Work out whatever equity split arrangement seems appropriate."
Marrs cautioned homeowners to carefully review any such arrangements to ensure they are getting a fair amount of the equity and that they are relinquished from any liability for their mortgage debt. If so, this arrangement can be beneficial for the homeowner.
"Remember it is better to have half of something than zero of nothing. If it goes to the auction, you could end up with nothing plus the poor credit to live with for the next 10 years," Marrs said.
If you decide to sell your home on your own, market it well to get the best price possible. Thanks to the increased use of the Internet by consumers looking for a home, you can gain a lot of exposure by listing your property online. Sellers will soon be able to post a property on RealtyTrac, the fourth-largest real estate website with more than 2 million monthly visitors.
Deed in lieu of foreclosure
This simply means you transfer ownership of your property to the foreclosing lender in order to stop the foreclosure proceedings. It's really a last resort for homeowners and should only be used if none of the other options, including selling your house, work.
You'll still walk away with nothing to show for the property, but most homeowners who choose this option don't have any equity in the property anyway. The advantage is that your credit won't be as badly damaged.
Fully investigate every other option before you decide to opt to deed your property to the lender in lieu of foreclosure.
Consult a Real Estate Professional
Whether you decide to restructure your payments, refinance, sell or deed the property in lieu of foreclosure, you should enlist the help of a local real estate professional – such as a real estate agent or attorney – to guide you through the process.
Many homeowners in default don't have the money to pay an attorney and don't want an agent's commission to eat away at any profit from a home sale. But keep in mind that just an hour or two with an attorney may be sufficient to ensure that you're avoiding any pitfalls in the process. And a good agent will give you solid advice even if you can't afford to have them list your home. They know that if they help you out now, you're more likely to use them the next time you buy or sell a home. And they know you're more likely to refer them to a friend.
Contact a local pre-screened agent using the RealtyTrac Agent Network.
Be Wary of Scams
If you need to refinance your loan to help you stop the foreclosure, there are reputable lenders out there who can help you out. And if you decide to sell your home before the foreclosure sale, there are qualified buyers and investors looking to buy, and reliable real estate agents able to assist you. You need these people to help you avoid losing the house at public foreclosure auction.
But some people take unfair advantage of homeowners in default. These scammers will promise to help you but will only leave you in a worse mess than you started. According to HUD, the most common scams are Equity Skimming and Phony Counseling Agencies.
In an equity skimming scam, you will be approached by someone who promises to pay off what you owe to the foreclosing lender if you hand over ownership of your property, usually through what's called a Quit Claim Deed. Once you're out of the house, the new owner rents it out for a few months and never pays off your mortgage, causing the lender to foreclose. You end up with a foreclosure on your credit history and with little or nothing to show for any equity you had built in the property.
Phony counseling agencies contact homeowners in default and offer help for a fee. Once they have your money, they may not do anything for you. If they do help you, it will be by contacting your lender or suggesting that you sell your house – tasks you can do on your own.
On its website, HUD suggests the following precautions to avoid scams:
- Don't sign any papers you don't fully understand.
- Make sure you get all "promises" in writing.
- Beware of any contract of sale or loan assumption where you are not formally released from liability for your mortgage debt.
- Check with a lawyer or your mortgage company before entering into any deal involving your home.
- If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer by contacting the state's Attorney General, State Real Estate Commission or the local District Attorney.
"Whomever you deal with, get some references," Marrs said, adding that he teaches investors that credibility is everything. "Certainly try to work with someone who is a reputable and can back it up. Do this whether dealing with an investor or real estate agent. There are performers and non-performers in every profession."
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