People may face foreclosure for many reasons. Extreme changes in life situations — job loss, death, divorce, prolonged illness and many others — or because they must immediately relocate. Foreclosure can occur when payments become three to four or more months late, depending on the mortgage terms.
In most cases even if the bank is able to sell the property, the borrower may have to pay for any difference between the remaining balance on the loan and the sales price of the property at foreclosure, depending on the mortgage terms and state law. Foreclosure stays on a credit report for seven to 10 years.
It's important to note that no one benefits from a foreclosure and mortgage servicers are doing everything they can to help borrowers who want to stay in their homes and have the means to pay their mortgage. Since June of 2007, the mortgage industry has helped avoid more than 5.2 million foreclosures via either loan modifications or workout plans.
As you may know, the Obama Administration has enacted a program to help homeowners who are having difficulty making their mortgage payments. The Making Home Affordable program is a partnership between the mortgage industry and the federal government, designed to stablizie the houring market. To see if you qualify for this program, visit www.makinghomeaffordable.gov.
If you are in danger of immediate foreclosure, call 888-995-HOPE – the Homeowner's HOPE(TM) hotline and talk to a counselor who can help you assess your current situation and map out a solution. Homeowner's HOPE(TM) is a counseling service provided by the Homeownership Preservation Foundation, an independent nonprofit that provides counseling services through HUD-approved counselors.
You can also find a counselor through NeighborWorks America's National Foreclosure Mitigation Counseling Program (NFMC) at www.findaforeclosurecounselor.org.
In addition, the National Foundation for Credit Counseling provides help to consumers in determining whether they might be at risk of losing their homes with Mortgage RealitySM at www.HousingHelpNow.org, an online quiz. This site is also in Spanish.
For those in situations that could lead to foreclosure, the U.S. Department of Housing and Urban Development offers some tips to avoid it at www.hud.gov/foreclosure/index.cfm. Veterans facing foreclosure can find assistance and view a valuable video at www.homeloans.va.gov/ondemand_vets_stream_video.htm. In addition, Home Loan Learning Center provides an overview of 12 things to know about the foreclosure process before calling a lender or servicer. Also, several l enders have provided HomeLoanLearningCenter.com with a list of contact information for borrowers who may be having difficulty making their mortgage payments.
Borrowers facing foreclosure may be required to pay certain taxes, but many people may be eligible for tax relief. On the Internal Revenue Service (IRS) Web site, borrowers can find details about foreclosure-related tax issues and how they may be reduced. The site includes a question-and-answer section and a worksheet to help borrowers determine whether they qualify for foreclosure-related tax relief.
And beware of foreclosure scams. For tips, visit the NeighborWorks Loan Modification Scam Alert web site at www.loanscamalert.org.
The mortgage payment is considered late if the lender or servicer receives it after the due date set out in the mortgage. A history of chronic lateness will harm the owner if or when a real emergency occurs. Serious consequences can begin when a payment is more than 15 days late. Here is a typical scenario:
- At 15 days late: The lender usually charges a late payment fee (the timing and amount of late charges vary from lender to lender or servicer to servicer).
- Two or more mortgage payments owed: Unless specific arrangements are made with the lender, all payments and late charges must be made before another payment is accepted and the loan is considered current.
- Three or more mortgage payments due and unpaid: The loan may be given to the lender’s attorney and foreclosure proceedings initiated. The entire balance of the loan may be due and payable immediately. In addition to the loan payments due, the owner is liable for legal fees incurred by the lender. At this point, the owner is in danger of losing the home.
Sometimes those in severe debt want to simply give the keys to the bank. This is called a "deed in lieu of foreclosure" and may not be as seriously damaging to credit but can still harm chances of renting a home or apartment elsewhere.
The primary causes of delinquency, foreclosure and bankruptcy are not poor planning, but illness, loss of employment or marital problems.
Few of us factor these things into our plans when evaluating loans and purchasing a house, but all of us should have some idea what we can do if trouble strikes. It’s much easier to look at alternatives before problems occur. If we know a layoff or major medical operation is pending, we can address the situation as soon as possible. Don’t risk losing your home. Meet with the lender immediately if you are forced to miss a mortgage payment.
If the owner has equity in the house, he or she may be able to acquire a second mortgage or equity line of credit in order to consolidate bills. This can improve the financial situation in an emergency, but borrowers should be careful—they are incurring greater indebtedness. Unless there is a solid plan for meeting these new obligations during reduced financial circumstances, borrowers should not add to their debt.
For those who cannot generate the funds on their own, there are many legitimate organizations dedicated to helping people in short-term trouble. Many churches, civic groups, and non-profit housing assistance or counseling agencies have or know of programs. State and local housing agencies are also places to seek help. Remember that time is both an enemy and a friend—use it wisely and take some preliminary steps before real trouble strikes.
Here’s the good news: Lenders and servicers don't like to foreclose on mortgages. Foreclosures cost more than can be made back, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders likely will try to work with them to bring the loan current. In order to do so, however, the owner must stay in communication with the lender and be honest about their financial situation.
The lender’s willingness to help with current problems will depend heavily on past payment records. If the owner has made consistently timely payments and had no serious defaults, the lender will be more receptive than if the borrower has a record of unexplained chronic late payments.
For those falling behind in payments or who know they are likely to do so in the immediate future, they should contact the lender right away about meeting to discuss alternative payment arrangements.
The lender will ask for information about monthly income and expenses. Owners must use realistic figures based on their current financial situation. The lender will also ask about assets and liabilities, including all debts and monthly payments and when they are due. If the lender needs proof of income (pay stubs, unemployment check stubs, tax returns, etc.) he or she will let the owner know. Remember, lenders do not want to foreclose.
An agreement between borrower and lender to prevent the loss of a home is called a loan modification or workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again.
The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property.
If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting “temporary indulgence.” An example of where this would be considered is a house that has been sold but the sale has not settled; another is a pending insurance settlement. The lender will want documented evidence, such as the sales contract, before granting indulgence.
Those who suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a “repayment plan.” This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.
In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a “forbearance plan” will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.
These plans represent last-ditch efforts by borrower and lender to keep the borrower in the home. They are not a substitute for good financial planning and likely will not be available if the borrower's payment record is poor. Lenders or servicers may work closely with good borrowers who are having a period of real emergency and hardship, but they are not inclined to cooperate with those who demonstrate little financial discipline.
Clearly, having a good payment record is important as is meeting with the lender at the first sign of trouble and being honest about any impending difficulties. There’s no shame in having problems; hiding them just makes overcoming them harder. Remember, the loan modification process is complicated and time consuming. Don't expect delinquencies that took months to develop to be corrected in one phone call.