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After missing about three mortgage payments, your lender’s foreclosure department will send a notice of default, asking that you pay, in full, by a deadline. If you miss that deadline, the loan will be sent to a local attorney to initiate foreclosure proceedings. The impending foreclosure will be advertised and the property will be sold in a public auction. If you haven't paid, and are still in your home at the time of the auction, the Sheriff's Department will forcibly remove you from your home.
The foreclosure process can last up to a year. Your credit score will be negatively impacted. The foreclosure remains on your credit report for 7-10 years. You will not be eligible to buy another home for 5 years. Furthermore, the IRS considers a foreclosure as a home sale. You will have to report any loss or gain.
- Your mortgage payment must be your top priority. Pay it before paying credit card bills or any unsecured debts. Cut any unnecessary spending out of your budget. Your other creditors may charge a late fee or ding you may damage your credit slightly, but they can’t take your house.
- Can anyone in your household get an extra job to bring in additional income? Even if you can't significantly increase your available cash or your income, the effort demonstrates to your lender that you are willing to make sacrifices to keep your home.
- Do not wait for a letter or legal notice. If you are going to miss a mortgage payment, contact your lender. If you provide them with bank statements, and other relevant documentation to document your financial condition, they may work out a payment plan.
- Open mail from your lender. The first notice you receive will offer good information about foreclosure prevention options. Correspondence may include important notice of pending legal action.
- If you are having trouble making your payment, contact a credit counseling service or debt management program. HUD funds free, or very low cost, housing counseling nationwide. Housing counselors can help you: understand the law and your options, organize your finances and represent you in negotiations with your lender. Find a HUD-approved housing counselor near you or call (800) 569-4287 or TTY (800) 877-8339.
Why would my lender want to help me?
The lender is invested. You are their client. You are paying interest for 30 years in monthly increments. When a lender forecloses on a property, they lose the 30 years of payments and 30 years of interest. They incur legal fees. They are required, by law, to sell the house at auction, which typically means they are selling the property below market value. Given the number of foreclosures currently on the market, lenders are fortunate if they can cover the legal fees and outstanding balance. Often they take significant losses. Working out terms with a reliable homeowner far outweighs the benefit of filing foreclosure proceedings.
The lender is invested. You are their client. You are paying interest for 30 years in monthly increments. When a lender forecloses on a property, they lose the 30 years of payments and 30 years of interest. They incur legal fees. They are required, by law, to sell the house at auction, which typically means they are selling the property below market value. Given the number of foreclosures currently on the market, lenders are fortunate if they can cover the legal fees and outstanding balance. Often they take significant losses. Working out terms with a reliable homeowner far outweighs the benefit of filing foreclosure proceedings.
What can I do?
There are two sets of options. Retention tools will allow you to stay in your home. Disposition tools will allow you to walk away without incurring the financial and credit damage of foreclosure. Lenders have to consider retention before disposition.
Special Forbearance (Type I): You must be at least 90 days past due and unpaid. The loan cannot be more than 365 days past due and may not be in foreclosure. It is only available on your primary residence. You must keep the property maintained. You cannot have filed bankruptcy.
The terms of the special forbearance require that you immediately resume regular monthly mortgage payments. The delinquent amount will then be divided over a number of months, determined by the lender, and added to the regular mortgage payment. This option requires that you maintain a consistent payment history while catching up on prior payments. That is not always possible.
Loan Modification: Loan modification resources are available free of charge through HUD. You can contact the lender directly or speak with a HUD counselor. There have been a lot of reports regarding loan modification scams in the news lately. Some ‘foreclosure rescue companies’ send letters to distressed homeowners that look like they are from the bank. Beware of the many unscrupulous companies preying on distressed homeowners in the guise of ‘mortgage modification specialists.’
A Loan Modification is a permanent change to the original loan agreement. You must be at least 90 days past due and unpaid. The loan cannot be more than 365 days past due and may not be in foreclosure. It is only available on your primary residence. You must keep the property maintained. You cannot have filed bankruptcy. There are several methods of loan modification that can be employed to maximize the benefit to the borrower and to the lender.
- Capitalization of Delinquent Principal: This method adds the delinquent amount into the mortgage loan. This is similar to the concept of refinancing a mortgage; however, it does not affect the loan term. It does not cover delinquent interest or insurance payments.
- Re-Amortization: Amortization is a term used to describe how long a loan will take to pay off. For example, a 30 year loan is amortized over 30 years. In this option, the lender lengthens your loan term. For example a 15 year fixed mortgage may be increased to 20 or 30 years. By increasing the amount of time to pay the loan, the monthly principal and interest payments decrease. This option can be included with a Special Forbearance to create a Type II Special Forbearance.
- Reduction of Interest: The lender may be willing to reduce the interest rate on your existing mortgage, which reduces the monthly payment. This option can be included with a Special Forbearance to create a Type II Special Forbearance.
- Combo Loan Modifications: Loan modification options can be combined. It is always up to the lender to decide which options to offer. Loan Modification will only be offered if Special Forbearance is ruled out as a workable option. Existing repayment plans and Forbearance agreements may also be converted to a Loan Modification if the borrower’s circumstances change.
Reduction of Principal: If you live in a neighborhood plagued by foreclosure vacancies and afflicted by plummeting home values, HUD may be willing to reduce the principal balance owed in order to reflect the market value of the home. This is rare. HUD will typically only allow principal reduction when entire neighborhoods are in jeopardy.
Partial Claim: In a partial claim the lender advances you the funds to bring your mortgage current. A promissory note is issued by HUD to the lender. The note will pay the full delinquent principal balance of the loan. The note must be paid back at some point in the future, but it is not required to be paid until the first mortgage is satisfied. It is a zero interest loan. It will be a lien on the property until paid. You can pay as little, or as much, as you want towards the note while paying your mortgage.
To qualify for this option, all other retention tools must first be ruled out. You must have the ability to immediately begin to resume making regular monthly payments. The loan must be at least 120 days past due and unpaid. The loan cannot be more than 365 days past due and may not be in foreclosure when the partial claim note is executed. Your lender can remove your loan from foreclosure if you can prove that your financial situation has improved enough to warrant a partial claim.
Loss Mitigation: FHA lenders receive financial kickbacks from the FHA for participating in the loss mitigation process. Loss Mitigation means to reduce loss by finding an alternative to foreclosure. Through loss mitigation the lender avoids the costs of foreclosure and potentially keeps a performing loan in their portfolio. You can potentially keep the home, or sell it for a profit. Generally, you will need to show a verifiable loss of income and the financial ability to meet retention agreements.
Pre-Foreclosure Sale (PFS): The lender allows 4-6 months for you to sell the home to pay the mortgage in full. The home is generally sold below market value to speed up the process. I recommend using a real estate agent who specializes in pre-foreclosure sales. You must complete a HUD Application, as well as your lender’s loss mitigation packet, to qualify for a PFS. You need to initiate the process prior to the home going into default. The mortgage must be at least 30 days past due at the time of the sale. The lender will be responsible for the appraisal and title search.
Short Sale: A short sale is another type of PFS. In a short sale the lender agrees to allow you to sell the home for less than the amount owed; however, you may not sell the home for less than 82% of the home’s appraised value. Typically less money will be owed to the lender as a result of a short sale compared to a foreclosure. The lender has the option to waive, or write-off, the remaining balance owed. A short sale will allow you to minimize damage to your credit, which will be beneficial when you are ready to buy another home.
Deed in Lieu of Foreclosure (DIL): FHA loans. You give your property deed to HUD in order to prevent foreclosure. Like a short sale, DIL is preferable to foreclosure. At end of the process, you owe no money on the loan. Any other loans against your home will still be outstanding. HUD offers a $500 stipend to encourage a timely evacuation of the property. To qualify, the property must be at least 30 days delinquent and all other disposition options must be disqualified. You must be able to demonstrate incurable and irreversible financial inability to make the mortgage payment.
Ask for a copy of the original mortgage note: A University of Iowa study conducted last year suggested that companies servicing mortgages are frequently negligent when it comes to producing the documentation to support foreclosure. In the study of more than 1,700 bankruptcy cases stemming from home foreclosures, the original note was missing more than 40 percent of the time, and other pieces of required documentation also were routinely left out. Persuading a judge to compel production of hard-to-find or nonexistent documents can, at the very least, delay foreclosure, buying the homeowner some time and turning up the pressure on the lender to renegotiate the mortgage.
Call your congressman: Check www.senate.gov and www.house.gov for contact information. Many consumers complain that it is difficult to get the banks to return a call. Many investors are overwhelmed with inquiries. If you are behind on your payment and the bank is not returning your call, contact your local senator or state representative. Several lawmakers in districts overwhelmed by foreclosures are taking unprecedented steps to help people stay in their homes, including picking up the phone themselves to negotiate with banks on behalf of their constituents.
What should I watch out for?
You may be contacted by companies offering to negotiate with your lender on your behalf. Whereas these businesses may be legitimate, they typically charge exorbitant fees for information and services that your lender, or a HUD approved housing counselor, will provide free of charge.
If any firm claims that they can stop your foreclosure and tries to get you to sign a document appointing them to act on your behalf, you may be signing over the title to your home. Never sign a legal document without getting professional advice from an attorney, a trusted real estate professional or a HUD counselor.
Consumer resources:
StableCommunities.org
NeighborWorks America - foreclosure prevention information
Hope Now - foreclosure prevention information
NeighborWorks® America
HOPE NOW
NeighborWorks America - foreclosure prevention information
Hope Now - foreclosure prevention information
NeighborWorks® America
HOPE NOW
Tips on avoiding foreclosure
Avoiding Foreclosure| Resources in Your State (HUD)
HUD-Approved Housing Counseling Agencies
Avoiding Foreclosure| Resources in Your State (HUD)
HUD-Approved Housing Counseling Agencies
For more useful information and resources go to The Consumer Warning Network.
Guaranteed Home Mortgage
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Comments
WOW! This article was VERY thorough!
If anyone has had any luck with any of these companies, could you please post it for the ones that cannot find one to work with you. We've almost lost once and just got a second chance that want last long so I need to get something done now, so if anyone knows the right number to call, i am sure a lot of people that hasn't found them would appreciate it but check out www.obamamortgage2009.blogspot.com or obamamortgage2009.blogspot.com
This whole stimulus package is just part of the governments long term plan to take away the power of the people. Are we going to do something about it or be lazy and think someone else is going to do it for us? It is time for a revolution. We need to overthrow the government and take our power back. Before there is nothing we can do about it. you should check www.obamamortgage2009.blogspot.com/2009/03/obamas-ortgage-modification-do-you.html#comments
I've been worried about the bank taking my parents house, but luckily they refinanced. I was worried something like Ramona's day dream would happen.
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