I. Overview of Topic
Avoiding home foreclosure is a topic on many people's minds these days. America's mortgage crisis is showing no signs of bottoming-out. Almost 3 million homeowners are currently late on their mortgages, according to the Mortgage Bankers Association (MBA), and another 1 million-plus are at risk of foreclosure in the near future.
And although the public perception is that this is a "subprime" mortgage crisis, in fact prime borrowers, too, are starting to default in growing numbers as housing prices decline - as is sometimes happening precipitously, especially in California, Florida, and Nevada. Increasingly, "underwater" borrowers, both prime and subprime, are simply walking away from their properties, seeing no way to salvage an investment that has a loan balance greater than the property is worth.
But letting your property foreclose may be an extremely unwise decision, say housing finance experts. Doing so will decimate your credit rating and make it very difficult to finance another home in the future - or to finance much of anything, for years to come. Today, there are a range of non-foreclosure options to consider, as discussed below. But first and foremost, you should discuss your specific situation with a knowledgeable housing counselor, even before calling your lender. Unfortunately, foreclosure/credit counseling is an area already starting to swarm with sharks - it's important to find a reputable non-profit counselor, not someone who's after your money or your home. A good, safe starting point is the Hope Now Alliance, a coalition of 28 lenders and loan services supported by the Bush Administration. You can reach them at 1-888-995-HOPE or visit their website at HopeNow.com. You can also find reputable nonprofit credit counselors at Hud.gov and MyMoneyManagement.net.
Your lender, you can be sure, does not want to foreclose on your home. Most banks and other mortgage lenders already have huge inventories of foreclosed properties on their books. As soon as your lender takes control of your property its value begins to drop while maintenance costs take off. Locks must be changed, the yard maintained, windows boarded up, repairs made. That's why you should inform your lender right away - before foreclosure happens - that you expect to have trouble meeting your payments. The lender will most certainly try to accommodate you in some way. But first, even before contacting the lender, speak to a reputable lending counselor, as suggested above, so that you're broadly familiar with your rights and choices. Be aware that your lender will not necessarily offer you a proposal that's in your best interests, and you may need to negotiate a better deal. Refinancing you house, for example - a common lender proposal - may or not be the best way to go. Before deciding what to do, get outside help and advice. As said, your best starting point is probably the Hope Now Alliance. (Be careful, though - some scam artists are setting up websites masquerading as the Hope Now Alliance, using very similar titles.)
Not everyone facing foreclosure can keep their home - that's the harsh reality. For some, a foreclosure followed by a period of financial retrenchment, may be the best option. Still, don't jump to this conclusion until you've considered the basic facts and options for avoiding home foreclosure described below.
- Try to deal with the problem before foreclosure happens. Once you receive the Notice of Default, your options narrow considerably.
- Foreclosure notices go out 30-120 days from a missed payment, depending on your State of residence.
- If you're foreclosed your credit rating will take a major hit that will last for years.
- 30-120 days (depending on State) from your Notice of Default your house can be auctioned.
- You'll be billed for the bank's loss on your property, if any - the so-called "deficiency judgment."
- Foreclosures rarely bring more than 80% of the market value of the house.
- The bank or financial institution which granted your mortgage may no longer own your mortgage. It may have "securitized" your mortgage and sold it to another financial institution in the secondary market, and it is the latter company with whom you must now deal.
Options for Avoiding Home Foreclosure
Every homeowner's case is different, which is why you should get counseling before attempting to negotiate with the lender. But in general terms, these are the most commonly-available options available at present. You should discuss any of these which seem to apply to your situation with your housing counselor or credit counselor --
- Loan Modification - Available on some VA and FHA loans to borrowers who have suffered unforeseen financial setbacks. Modification of loan to include more favorable terms. Lender approval required.
- VA Loan Refunding - VA loans only. The VA in effect buys your loan then re-issues it with more favorable terms.
- Short Sale or Short Payoff. You sell your house but the sale proceeds are less than the total amount you owe on the mortgage. In this case, the mortgage company may agree to write off the portion of the mortgage that exceeds the net proceeds from the sale.
- Deed-in-lieu of Foreclosure. Your home must be on the market for at least 90 days prior to applying this option. If after 90 days or more it hasn't sold, lender may agree to cancel your mortgage if you voluntarily transfer title of your property to the mortgage company. There can be no other liens on the property.
- Reinstatement. Lender agrees to allow you to pay total amount due at a later date, in a lump sum. You might consider this option if, for example, you expect to receive a substantial sum of money from some source in the future. As part of this deal, lender usually agrees to "forbear" from demanding payments until the agreed-upon future date.
- Assumption. A qualified buyer purchases property and takes over mortgage payments.
- Refinancing. Refinancing is usually considered a last-ditch option and is seldom recommended by industry experts. In some cases it may even be a predatory practice.
- Repayment Plan. Lender may agree to a repayment plan involving reduced or extended payments. But you should usually only make this proposal through a qualified housing or credit counselor or adviser.
- Special Forbearance. FHA loans only. Lender allows payments to be spread over an extended period of time.
- Partial Claim. FHA and some Freddie Mac Investor loans only. Places your past due payments into a 2nd mortgage, payable after you have paid off the 1st mortgage. Twelve month maximum past due payments.
- "Produce the Note". ABC News claims you can stall your bank "for months" simply by demanding that they produce the mortgage note you signed and reveal "Who owns my loan?" This can be difficult for your bank, since your loan was securitized and sold by Wall Street. So insisting they produce the note ("I am requesting a copy of the original note I signed") may actually be an effective foreclosure stalling tactic.
All reputable advisers agree that it's imperative to act quickly once you're behind on your mortgage, as lenders may, unknown to you, start foreclosure proceedings in as little as two months after you miss a payment. By contacting the lender (after receiving counseling, as discussed above), you may be able to halt the foreclosure proceedings.
That's it - our ten minutes are up! (OK, maybe twelve or thirteen if
you're a slow reader.) Below is a listing of Web resources to help you
continue your research on avoiding home foreclosure.
II. For Additional Research
This Section provides reviews and recommendations of Web sites and other
online resources on the topic "Avoiding Home Foreclosure."
Home Loan Learning Center
One of the best, clearest tutorials online on all aspects of home buying and mortgages. Pay particular attention to the "All About Mortgages" section. Sponsored by the Mortgage Bankers Association.
Homeownership Preservation Foundation
Good quick overview of Homeownership Foundation (sponsor of HopeNow.com), foreclosure and counseling options.
A good source of reputable personal credit counseling services. Also provides several other types of counseling services: debt management, financial education, and bankruptcy.
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