Millions of Americans are losing, or close to losing, their homes. Foreclosures in the U.S. are hitting record numbers. If you’re having trouble paying your mortgage, learn about the steps you can take to avoid foreclosure or minimize your debt after it happens. Quick action is the key to success — it can save your home or help protect your credit rating.
Don’t Walk Away: Consider Your Options
Don’t give up and let the lender foreclose on your home without considering your options. A foreclosure will hurt your credit rating and make it difficult, if not impossible, to buy another home anytime soon. In addition, if the profits from selling your home don’t cover the unpaid portion of your loan, your lender might sue you for the rest.
Your best options if you’re having trouble making mortgage payments include:
- Negotiating with your lender
- Getting government help
- Filing for bankruptcy
- Selling your home yourself, or
- Giving your home deed to the lender.
These options are described in more detail below.
Beware of scam artists. People facing foreclosure are often preyed upon by others claiming they’ll “help.” Some homeowners have unwittingly signed documents giving these scammers title to their property, turning the owners into renters. Don’t sign anything without getting a professional opinion first.
Negotiating With Your Lender
As soon as you realize you’ll have trouble paying your mortgage — ideally, before you’ve missed any payments – contact your lender. Now, more than ever, lenders are willing to negotiate with home loan borrowers, if only to reduce the number of foreclosures they’re dealing with. (Some lenders are even taking the initiative and contacting at-risk borrowers themselves.)
Do it sooner rather than later. If you call soon, you may be able to work out a solution with your lender. But if you’ve already missed three or four payments, it may be too late, and the lender may insist on foreclosure.
Possible solutions. The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to redo the terms of your loan.
What to say when you contact your lender. Here’s what you should ask for in lender-language. (And by the way, you’ll probably need to get to the right department first — it may have a name like “loss mitigation.”)
- Forbearance. You make a reduced payment, or no payment, for an agreed-upon period of time. Usually, the lender requires you to make up the difference at a later time. The lender is most likely to agree to this if you can demonstrate that you will soon receive a bonus, tax refund, or some other extra cash.
- Loan reinstatement. You agree to make up your missed (or reduced) payments by a specific date.
- Loan modification. Your lender agrees to alter the terms of the loan so that you can better afford the payments. For example, the lender may agree to add your missed payments to your loan balance, to stretch out your loan over a longer term (which will lower your payments but result in more interest over the life of the loan), or to convert an adjustable rate to a fixed rate mortgage.
Getting Government Help
The U.S. government is currently discussing ways to help homeowners facing foreclosure (and thereby lessen the impact on the U.S. economy). In the first plan to be implemented, FHASecure, the Federal Housing Administration (or FHA, at www.fha.gov) may grant FHA refinancing to borrowers who can show:
- a history of on-time mortgage payments before the borrower’s teaser rates expired and the loans reset
- interest rates that have or will reset between June 2005 and December 2008
- 3% cash or equity in the home
- a sustained history of employment, and
- enough income to make the mortgage payment.
Of course, many people won’t be helped by FHASecure, particularly if they’ve lost their job or their house’s value has declined. Keep your eyes on the news for other programs or forms of relief.
Filing for Bankruptcy
Filing for bankruptcy may help you keep your home, or at least get you out from under your mortgage. When you file, the foreclosure process is legally stopped (called an “automatic stay”). It can’t be reopened until your bankruptcy case closes or the lender gets court permission to proceed (called “lifting the stay”).
Selling Your Home
If you simply can’t afford the house you own, the above options won’t help. You will probably lose your home. But don’t wait for your lender to make the first move. If your home has appreciated in value since you bought it, you may be able to sell it yourself. (In fact, real estate investors may show up on your doorstep hoping for a bargain.) Again, contact your lender, who may let you stop making payments until the house is sold.
Ideally, the proceeds from the sale will cover your mortgage and selling costs. But if they won’t, ask your lender to consider what’s called a “short sale.” That means the lender accepts the sale proceeds even if they’re less than the amount you owe.
Handing the Deed Over to the Lender
If no one is interested in buying your house, your lender may agree to take the deed and cancel your debt. This is called a deed in lieu of foreclosure. The idea is that the bank can then sell your house (as with an actual foreclosure) but won’t report it as a foreclosure to the credit rating agencies — in fact, you can negotiate with the bank about how it can help you preserve your credit rating.
Short sales and deeds in lieu of foreclosure will no longer leave you owing taxes. In the past, the IRS considered forgiven debt to be taxable income. However, this was erased for situations where the loan was for a primary residence, by the “Mortgage Forgiveness Debt Relief Act of 2007,” or H.R. 3648.