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Unfortunately, people do fall behind on their mortgage payments. Sometimes unexpected expenses and or bills are all it takes to push your budget over the edge. If you've fallen behind on your mortgage payments and are facing foreclosure, you still have options. The last thing you want to do is crumble under the stress and capitulate to your misfortune. There are many things a person can do to better their situation and prevent foreclosure from leaving their life in shambles. Please look over the following information to learn what you can do for yourself and what you need to be careful of.
Identify Your Problem
Your first order of business should be figuring out what got you into financial trouble in the first place. What caused your current situation? (Job loss, illness, divorce, decreased income, overextension) Is your situation temporary or is it something you expect to cope with for years to come? Can you do something on your own to better the situation? After you've made this assessment, identify how much you can realistically afford to pay on your mortgage each month.
Throughout this process, the best thing you can do is be honest with yourself. If you've simply agreed to a mortgage you can't afford, recognize that. You won't be able to help yourself or get help until you've come to terms with the reality of your situation. Also, don't panic. Approach the situation with level head. It's possible that your assessment will reveal that you're not in as bad of shape as you thought you were.
Communicate
If you begin falling behind on payments or foresee that you're not going to be able to make payments in the future, contact your lender as soon as possible. They cannot penalize you for trying to find a solution before it's too late. Ask to speak with your lender's delinquent loan or loss mitigation specialist to begin reviewing strategies that might allow you to keep your home and save your credit. Don't let your lender divert you to the collections department. Demand to speak with someone in the loss mitigation department early on so that you can begin looking for a solution. Once you've contacted someone that can help you, candidly explain your situation and confirm that your initial assessment was accurate. It might be wise to prepare a packet of documents related to your financial situation before approaching your lender. Here is a list of some of the documents you'll want to include in the packet (Make sure you keep your own copies of everything included):
- Signed and dated letter that briefly explains your situation
- Documentation of your hardship (doctor's letters, etc.)
- One month of pay stubs or other proof of income
- 2 most recent years of federal tax returns and W2's
(3 years if self-employed)
- An accurate monthly budget showing all expenses and income
- A list of your assets (cars, bank accounts, investments, etc.)
- A list of your liabilities (mortgages, loans, liens, and other outstanding debts)
After these actions have been taken, start exploring your options. It would be wise to know something about the solutions your lender might offer before talking with them. Here are some strategies the lender might suggest:
Reinstatement
You pay the bank all of the back payments you owe and continue making your regular payments with little to no penalty. Unfortunately, this is not an option for most people.
Partial Reinstatement
You pay the bank at least one-half of the back payments you owe and agree to a repayment plan for the rest of the arrears. You must also continue to pay your regular monthly payments.
Repayment Plan
You continue to make your regular mortgage payment with an additional amount added. The additional amount pays for the payments you missed. Once your back payments have been paid, your payment returns to the original amount. However, usually a lender won't agree to a repayment plan if it will take you more than a year to get current on your loan. If you agree to a repayment plan, be realistic. If you have any doubt that you won't be able to make the increased payments, it's likely that this is not the best option for you.
Forbearance
The bank agrees to accept lower or no monthly payments for a limited amount of time (usually no more than a year). At the end of the forbearance period, you must pay any back-payments and continue paying the original monthly payment. The downside of a forbearance agreement is that even if your payments cease for a while, interest does not. This means that you will be paying more in the long run. To get an idea of how much extra you might be paying because of a forbearance agreement, you might want to consult this valuable interest calculator:
Modification
The bank agrees to change one or more terms of your loan. Some of these changes might include: reducing the interest rate, extending the term of your mortgage, or adding the arrears on your loan to the unpaid principal balance. Depending on the terms of the modification, such an agreement could work out very well for the debtor. Just be sure that you fully comprehend the conditions of the agreement. Seek legal or professional advice from a third party if you are skeptical of any of the details in the modification plan.
Other Possible Solutions
Refinance
In some cases, you might be able to take out a new mortgage to pay off the one you have defaulted on. This might make a lot of sense for someone who can get the credit and will be able to make the payments. However, getting yourself into another situation in which you will fall behind on payments is never wise. If you think refinancing might be an option for you, contact a legitimate lender and proceed with caution. Make sure you understand what you're getting yourself into and that you thoroughly understand the mortgage agreement. When arranging a refinance, be especially careful of unnecessary or outrageous processing fees and high or flexible interest rates.
Whole Sale
It is possible that you've decided you cannot or do not want to keep your home. In this case, selling the property before it is foreclosed on might be your best option. Even if you are in foreclosure proceedings, you still have the right to sell your property to repay your debt. If you can sell your property for what you owe on it and repay your lender in full, the matter will be over. The challenge here is negotiating a sale quickly enough. The deal must be closed before your property is foreclosed on. Arranging the sale of a property often takes weeks. Make sure that you have a very reliable buyer and that the sale will go through quickly before you decide to count on selling your property.
Short sale
An owner may still sell their property even if they owe more on it than they can sell it for. However, the bank must agree to this sort of deal. Some lenders will agree to take the proceeds from a short sale as re-payment and call it a done deal. Although they do lose some, some lenders would rather get a property off their hands before they have to sell it themselves. This may sound like a great deal for you, however, you still must be very cautious. As in a wholesale, you must be sure that the sale will go through in time. Also, a short sale goes on your credit report as a "settlement". This indicates that you paid less than you were owed and is damaging to your credit score. You may also have to pay an IRS bill on the unpaid debt because it is generally considered "income" by the government. Someone familiar with these types of transactions might be able to avoid these consequences. If it seems like a short sale might be the best option for you, it might be wise to consult or hire an experienced attorney to broker the deal.
Deed-In-Lieu
If you cannot sell your property but are still willing to give it up outright, a deed-in-lieu arrangement might work for you. In this sort of deal, you surrender the deed to your property and your lender agrees to release you from your mortgage in return. Unfortunately, it might be very hard to get your lender to agree to this sort of arrangement. Many lenders will first require you to try and sell the property. They might also want proof that your delinquency was due to an unavoidable hardship like an illness or a costly accident. Lenders will not accept a deed-in-lieu if there are other liens on your property. Finally, if you agree to a deed-in-lieu arrangement, you lose any equity you have in the property.
Specific Loan Benefits
If your loan is insured by the Federal Housing Administration (FHA), you might qualify for an interest and payment free loan to get you current on your payments. You won't have to pay on this loan until the mortgage is paid off or you sell the house. Different types of loans have similar options attached to them. Talk to your lender or insurer to see if you have any special options.
Bankruptcy
Although bankruptcy might have the same negative connotations as foreclosure attached to it, it might be a good option for some people. When a person with a property under foreclosure proceedings files for bankruptcy, the foreclosure is temporarily put on hold. If someone files bankruptcy under chapter 13, also known as reorganization, it is possible that they'll be given a plan to make up their delinquent payments and keep their home. However, people filing under chapter 7 may not have as good of luck. Recently, many people have tried to fraudulently dodge foreclosure by filing under chapter 7. Consequently, the court is less willing to facilitate such a move.
Dealing with bankruptcy and foreclosure separately is tough enough. If you face the prospect of handling both at the same time, it would probably be very wise to hire an attorney to assist you.
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