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The timeline
9 steps to getting out of this mess
Your options
Avoiding Foreclosure Scams
Solutions for temporary problems
Home foreclosures surge 42% in 2006
Real estate markets are slowing. Interest rates are ticking up. And the phones are ringing at bydesign a Los Angeles-based credit counselor, as homeowners start to panic about not being able to make their mortgage payments.
"The number of people asking for appointments to talk about foreclosure is definitely up," said Susan Ulaga, the nonprofit service's senior vice president of counseling. Rising rates "are really putting a crunch" on homeowners with adjustable-rate loans.
Nearly a quarter of the nation's mortgages have rates scheduled to reset this year or next, which means higher payments for millions of homeowners. How many will default isn't known, but the Mortgage Bankers Association, which tracks delinquencies and foreclosures, expects a "modest" uptick in both by the end of the year.
If you're in danger of falling behind on your mortgage, or if you're already delinquent, it's important to know what's ahead and what your options are. Usually, the faster you move, the more choices you'll have about your financial future.
30 days: Your troubles actually start as soon as you miss a single payment. Lenders may not contact you until you've skipped a second payment, but most will report the first late payment and every subsequent delinquency to the credit bureaus. Even a single late payment can devastate your credit score, the three-digit number that lenders use to help gauge your creditworthiness. Each subsequent "late" further decreases your score, making it more difficult and expensive to get a loan or a refinance that might help your situation. In addition, lenders typically tack on late fees of 5% or so for each missed payment.
90 days to one year: Eventually, if the payments aren't made, the lender will file a "notice of default" with a local courthouse and send you a letter saying that the foreclosure process will start unless you make good the missing payments.
How quickly the notice is filed depends on the individual lender. Some hold off if you contact them to work out a payment plan or otherwise explain your situation. Others are more aggressive and start the process as soon as possible to try to protect their investment.
"They may do it as early as 90 days, or as late as a year," explained Anthony Hsieh, president of Lending Tree. "It really depends on the lender's temperament."
Usually, this notice means that the amount you owe has shot up as well, since the lender typically adds substantial fees to cover its legal costs.
The notice of default "is a big threshold," Hsieh said. "Once you get into that state, it's a whole different world. Your options are fewer."
The notice of default is generally picked up by the credit bureaus, further depressing your credit score and making refinancing the loan extremely difficult.
(In addition, the notice tips off scam artists that you're in trouble and may be vulnerable to various "equity skimming" schemes. One common ploy: The scam artist promises to take over your payments, but instead rents out your house and keeps the rent payments as pure profit. The home goes into foreclosure, your credit is trashed and you've lost any equity you had in the home.)
90 days more: Borrowers typically have 90 days from the notice of default to make up the deficit before the lender sends out a "notice of sale," which sets a sale date for the house (typically within the next 15 to 30 days).
Some lenders will allow you to keep your original loan if you can make up the missing payments plus any late fees and legal charges. Others will insist you refinance with another lender. You can also halt the foreclosure, at least temporarily, by filing a lawsuit or filing for bankruptcy. For either legal option to work, you'll have to be able to come up with a payment plan to fix the deficit.
Lenders today typically offer a variety of solutions for people who have fallen behind on their mortgages. Among them:
- Temporarily reducing or waiving payments.
- Setting up short-term repayment plans to help you make up the deficit.
- Adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.
If you have certain types of loans, you may have even more options. If you have a mortgage insured by the Federal Housing Administration, for example, you may qualify for an interest-free (and payment-free) loan to get your mortgage current. The money doesn't need to be paid back until you pay off the mortgage or sell the house.
If you can work out a solution with the lender quickly enough, you can contain or even avoid serious damage to your credit. That's among the reasons housing experts typically urge you to call your lender as soon as you know you'll have trouble making a payment.
This is good advice, but trickier than it may seem at first, for two reasons:
Lenders can make it tough to get to the right people. The folks you want to talk to are in the "loss mitigation" department. But many lenders don't routinely route borrowers to that department until they've missed several payments. Until then, you might be dealing with the lender's collections department, which typically offers one option: Pay up now. If you're serious about keeping your home, you may have to really push to get to right people.
"The loss mitigation department (is) where the options are really going to open up," ByDesign's Ulaga said.
You have to be able to make the payments. If you agree to a lender's "workout" or "loan modification" solution and then fail to make the agreed-upon payments, you'll be in a world of hurt. At best, you'll have "a lot fewer options the second time around," Ulaga said. More likely, Hsieh said, the lender will simply accelerate the foreclosure process.
This can be a big problem if the financial crisis that caused you to fall behind isn't over. If you don't know where you're going to get the money to make the payments, trying to work out a solution with your lender will be tough.
"If you're honest like that, (lenders) are not going to want to work with you," said New Jersey bankruptcy attorney John Amorison. "If you're dishonest, you breach the agreement."
That's no reason to hide from your lender or ignore its letters, Hsieh said. Even if you can't work out an agreement, keeping in contact is usually the right choice: "At least you know where you stand."
Filing a lawsuit or bankruptcy carries similar risk: If you don't have the money to make the payments, the foreclosure can proceed, and you may have further damaged your credit score.
Don't be the next victim to lose your house to "consultants" who claims they will pay your mortgage.
More than 1 million borrowers have seen their homes put in foreclosure so far this year. And with more foreclosures, "foreclosure rescue" scams are also on the rise.
1: How it works
First, let's take a look at what the trends are. We're seeing triple-digit percentage gains of foreclosures from last year in places like Nevada, Wyoming and Alabama. Generally, areas under economic stress tend to have more foreclosures.
As a general rule of thumb, foreclosure rates tend to go up in colder months simply because fewer houses are sold, according to Rick Sharga of RealtyTrac.
Foreclosure rescue scams are deals that proclaim to "save your house" or "pay your mortgage." Don't be fooled.
In one foreclosure scam scenario, you - the homeowner - surrender the title to your house thinking you'll become a renter and buy the house back over a few years.
For the most part, you'll lose your house and won't be able to buy it back...and the scam artists walk away with all your equity. Sometimes homeowners just sign a bunch of documents, not even realizing they've signed over ownership of the house.
In other cases, scammers will call themselves foreclosure consultants. They'll promise to persuade your lender to negotiate, or they promise to find a buyer for the house.
2: Contact your lender stat
If you have received a foreclosure notice, or even if you feel you won't be able to make your mortgage payments, contact your lender immediately. You may be able to negotiate your payment schedule.
Lenders do not want to foreclose because it's expensive for them, says Todd Beitler, a foreclosure expert.
3: Know the warning signs
The Department of Justice outlines a few red flags that you should keep in mind if you find yourself behind on your mortgage payments or facing foreclosure.
First, be suspicious of any person or company that calls itself a mortgage consultant or a "foreclosure service."
Be wary of marketing procedures. Don't trust anyone who uses flyers or solicits for business door-to-door. Be suspicious of offers to lease back your home, so you can buy it back over time. These offers are weighted against you.
And of course, don't fall for promises that seem too good to be true. Watch for promises that lure homeowners into deals. These offers may include promises to "save your credit" or maybe the company promises to "find a buyer within seven days."
4: Get it in writing
Never be pressured to sign a contract. Review the paperwork with a lawyer and don't sign anything that has any blank lines or spaces. Information could be added later and you won't know about it.
Remember, verbal agreements don't mean anything. You'll want to get everything in writing and make copies of the paperwork. You can also check out the company at bbb.org.
Remember, legitimate companies will sit down with a homeowner and collect documentation, says Beitler. They will put together a package and present it to your lender.
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9 steps to getting out of this mess
So what to do? First, you'll need to take a hard, clear-eyed look at your financial situation. To that end:
Make a budget. Sketch out a spending plan for the next several months, including expected income and expenses. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In certain very limited circumstances -- such as when you are absolutely sure your financial hardship will be short-lived -- it may make sense to skip payments on some bills so you can pay your mortgage. Read "How to not pay your bills" to learn about the consequences that may follow. Another option: borrowing money from friends or family, or tapping retirement funds. Do the latter only if you're convinced you can make future payments; you don't want to drain your retirement funds if you're only going to end up losing the house.
Consider getting help. Legitimate credit counseling services, those associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies, typically have housing counselors that can help you evaluate your options. Or you can find a housing counseling agency approved by the Housing and Urban Development Department by calling (800) 569-4287. If you have a Veterans Administration loan, you can call (800) 827-1000 to get a referral to a financial counselor.
Check your refinance options. If you have equity in your home, your credit rating is relatively intact and your lender hasn't yet filed a notice of default, you may be able to get another loan with more affordable payments. An experienced mortgage broker can let you know your options. Be cautious about jumping into another risky loan, though: adjustable, interest-only or "option" mortgages might just put off the day of reckoning and you could find yourself facing even higher payments down the road.
Be realistic. Many times, Amorison said, people struggle to hang on to a house that they simply can't afford when they'd be far better off without it.
"People are just too tied to their homes," Amorison said. "It's just property."
That may seem harsh, but it's far better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure.
Get organized. If you are going to try for a loan modification, you'll need to prepare a small mound of documentation. The lender will specify what it wants, but typically you'll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a "hardship letter" that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.
You may also want (or be required) to provide a market analysis of your house, Ulaga said, to document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell.
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Leaving home
If a loan modification or refinance isn't possible or feasible, your options come down to these:
Sell the house. If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You'll preserve what's left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future
Offer a deed in lieu of foreclosure. If you can't sell the house for what you owe, but you're not deeply "upside down" on your mortgage, this may be an option: you propose handing over the deed to your home and your lender agrees to release you from your mortgage. This usually keeps you from having to pay any deficit that might be owed on the property, while the lender avoids further legal costs related to a foreclosure.
Lenders can't be forced to accept a deed, however. Typically, lenders require that the borrower make "a really good effort" to sell the home first, Ulaga said, and show that their delinquency was due to "unavoidable hardship" before they'll agree to a deed in lieu of foreclosure.
Negotiate a short sale. If you owe substantially more on your home than it's worth, you may be able to get the lender to accept less than it is owed by negotiating a "short sale." You essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit.
A short sale can further damage your credit scores, often showing up as a "settlement" that indicates you paid less than you owed. You may also face an IRS bill on the unpaid debt, which is generally considered income to you. A skilled negotiator may be able to avoid these consequences or at least minimize them, so you may want to consider getting an experienced attorney's help.
Allow the foreclosure to proceed. This is generally the worst choice. In some states and in some circumstances, the lender can even go after you in court for any deficit between what the house eventually sells for and what you owe. An attorney or housing counselor can let you know if that's a possibility.
How to Stop Foreclosure
A loss of a job, medical expenses and other life-altering occurrences can happen to anyone, causing us to fall behind in our loan payments. If we neglect paying our credit cards it hurts our credit rating, but if we stop paying our home loan the situation is even worse, because the lender can foreclose, taking ownership the home.
Don't Be Embarassed
You must put your pride on hold if you're truly serious about stopping the foreclosure process. Lenders do not want to foreclose, and will usually work with you to get you back on track.
Rule #1: Contact your lender as soon as you know your payments will be late.
Rule #2: Never ignore the lender's letters or phone calls. Ignoring the problem won't make it go away.
Rule #3: Never assume your situation is hopeless.
Solutions for Temporary Problems
Reinstatement
Reinstatement might be possible when you are behind in your payments but can promise a lump sum to bring payments current by a specific date.
Forbearance
In forbearance, you are allowed to delay payments for a short period, with the understanding that another option will be used afterwards to bring the account current.
Lenders sometimes combine Forbearance with Reinstatement if you know you'll have the funds to bring your account current by a specific date.
A Repayment Plan
If your account is past due, but you can now make payments, the lender might agree to let you catch up by adding a portion of the past due amount to a certain number of monthly payments until your account is current.
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Solutions for Longer-Term Problems
Mortgage Modification
If you can make your regular payment now, but cannot catch-up the past due amount, the lender might agree to modify your mortgage. One solution is to add the past due amount into your existing loan, financing it over a long term.
Modification might also be possible if you no longer have the ability to make payments at the former level. The lender can modify your mortgage to extend the length of your loan (or take other steps to reduce your payments).
Selling Your Home
If catching up is not a possibility, the lender might agree to put foreclosure on hold to give you some time to attempt to sell your home.
Deed in Lieu of Foreclosure
When the lender allows you to give-back your property--and forgives the debt. It does have a negative impact on your credit record, but not as much as a foreclosure.
The lender might require that you attempt to sell the house for a specific time period before agreeing to this option, and it might not be possible if there are other liens against the home.
For FHA Loans
The lender might be able to help you receive a one-time payment from the FHA Insurance fund. Your loan must be at least 4 months but no more than 12 months past due and you must show you are able to begin making full mortgage payments.
- You must sign a promissory note which allows HUD to place a lien on your property for the amount received from the fund.
- The note is interest free, but must eventually be repaid.
- The note becomes due when you pay off the loan or when you sell the property.
For VA Loans
VA VA Regional Loan Centers offer financial counseling that's designed to help you avoid foreclosure. Call 1-800-827-1000 and ask for the phone number of the Loan Service Representative in your area.
Contact a HUD-Approved Counselor
If you don't want to talk with your lender first, contact a HUD-approved counseling agency. A counselor can help you determine which options might be available to you and negotiate with your lender to work out a repayment program. You can find an approved agency on the Web.
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Put the Process in Motion
Your lender won't automatically put you into a program to bring your loan up-to-date. You must put the plan into motion and provide the lender with the documentation they require to analyze your financial situation.
Although lenders do not want to foreclose if it can be avoided, they do want to make sure you can follow-through on any promises you make to bring your account current.
Be prepared to share all details about your financial situation with your lender.
- An explanation of your current financial circumstances.
- Details about your current income.
- A list of your household expenses.
The lender will review and analyze your situation before offering a solution to bring your loan up-to-date.
The number of homes in the United States foreclosed by lenders rose 42 percent in 2006 from a year earlier in a sign that many homeowners have became overextended in mortgage debt, a real estate information service reported Thursday.
More than 1.2 million foreclosure filings were reported nationwide during 2006, which is a rate of one foreclosure filing for every 92 households, according to RealtyTrac, Inc.
The jump in foreclosures last year marks a return to normal levels as the housing market cools from multiyear highs of sales and appreciation, the company said.
Recent homeowners who believed the housing market would continue its break-neck pace or used flexible mortgages to make a purchase may be feeling a sting, the company said.
As much as $1.5 trillion in adjustable-rate mortgages are due to have their rates reset this year, according to the Mortgage Bankers Association. Many recent homeowners are already struggling to make those higher payments and are drifting toward loan default and foreclosure, said James Saccacio, chief executive officer of RealtyTrac.
"As more and more of these loans re-set, we saw a surge to finish the year, with the fourth quarter producing more foreclosure filings than any of the three previous quarters," Saccacio said.
While the increase in foreclosures could add to a glut in housing stock, "most local markets have been able to re-absorb foreclosure homes without seeing any major damage to the local economy," Saccacio said.
Colorado, Georgia and Nevada saw the highest foreclosure rates, the study found.
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