FORECLOSURE - How To Save Your Credit If You Can't Save Your Home

FORECLOSURE - How To Save Your Credit If You Can't Save Your Home

Rescue Your Home From Foreclosure - What To Do When Your Lender Starts Calling

I you're like most homeowners, your mortgage payment is the single largest expense you have every month. It's also the most important one. If you fail to make your house payments on time, you can lose your home, including everything you've invested in it and ruin your credit rating for years and years to come.

Nobody wants to lose their home to foreclosure. That's why it's so important when buying a home to make sure not to overbuy or spend more than your budget can realistically handle. To ensure against late payments and foreclosure, you should have a reserve fund that would cover several months of mortgage payments in case unexpected events play havoc with your finances.

Unfortunately, because mortgage payments are so large compared with other bills and debts, it may be the very payment you just can't make when times get tough and cash runs short. If you're already late making one or more payments on you home, or if you can see you'll have a problem making future payments, the time to act is now, before your lender initiates foreclosure proceedings.

What Is Foreclosure?

Foreclosure is the legal process by which your lender can repossess your home because you fail to fulfill the terms of your loan repayment agreement. If it turns out the value of your home is less than the amount you owe the lender (including late-payment charges and legal fees), the lender may seek a "deficiency judgment" against you. If the lender is successful, you would not only lose the home, you would be required to pay the difference between your outstanding debt and what the lender was able to recoup by selling your home.

Both the foreclosure and deficiency judgment would become part of your credit profile, marking you as a bad risk for credit from other lenders. Your ability to borrow money could be hampered for many years down the road.

Act Fast!

The more quickly you contact your lender when you are having trouble making payments, the more options you will have for saving your home and your credit rating. Keep in mind, lenders would rather not own homes. They simply want their money back, with interest, at predictable intervals through your monthly payments.

Many mortgage lenders today are willing to work with homeowners who fall behind on payments, offering them opportunities to repay the outstanding amount in a variety of ways. It's often less expensive for a lender to help you keep your home than to go through foreclosing, repossessing and selling the property. The more temporary the problem looks to a lender, the more likely it is you can work something out.

The key, however, is to contact your lender and explain your situation early. The longer you wait, the more unmanageable the situation will become as you incur late fees and legal charges in addition to your mounting unpaid debt.

The Foreclosure Process

Depending on the lender and state laws, foreclosure can take anywhere from a few months to a year and a half. Here are the stages leading to a foreclosure.

1. The lender (or the mortgage services working for the lender) will notice your payment has not arrived on time. Usually after 16 days or so, they will contact you and encourage you to bring the account up to date.

2. After a month has passed with no payment (or no payment in sight), the collections process will begin. For several months after payments go into arrears, the lender may offer one or more alternative loan "workout" plans to get you back on track.

3. Usually after 3 or 4 months of payment failure, the lender will initiate the foreclosure process. While the foreclosure department will move as quickly as possible toward the foreclosure sale, the lender's "loss mitigation" department may continue to look for an acceptable workout. Whichever department gets their job done first determines the fate of your home.

4. If the foreclosure department succeeds, the lender will take ownership of the property. You will receive an eviction notice, specifying the number of days you have to move out. The home will then be sold.

Working It Out

Most lenders will offer a "forbearance program" for borrowers with financial difficulties. This might involve:

* A repayment plan. A variety of plans are possible. To allow some breathing space if you have a short-term cash-flow problem (such as a medical emergency or an expensive car repair), the lender may add a portion of the missed payment onto your next two or three payments. If you lose your job or can't work due to illness, and the situation looks temporary, the lender might suspend payments for two or three months, then put you on a repayment plan.

If you fall behind on several payments, the lender may require you to pay a third to half of the outstanding amount (plus fees, if any) upfront in cash. The rest of the delinquent amount would then be tacked onto subsequent payments for a year or more.

* Loan modification. This option is more often used with borrowers who can't afford a repayment plan because of a more serious problem, such as a reduction in income or too much total debt. In these cases, the terms of the loan may be adjusted (for example, lowering the interest rate) so monthly payments become affordable.

* Refinance. Your lender may agree to refinance your loan with a longer repayment schedule and/or a lower interest rate, adding the delinquent debt into the new loan amount. More fees will be associated with this option than with loan modification.

* Short refinance. Using this aproach, the lender may agree to forgive some of the debt and refinance the loan with terms you can afford.

* Pre-foreclosure sale. If it becomes obvious you can't afford to keep the home, the lender might suspend foreclosure proceedings, giving you some time to sell the home and repay your debt from the proceeds.

* Short sale. This is like a pre-foreclosure sale, but in this case the lender allows you to sell your home even though it is worth less than your outstanding debt. The lender takes the proceeds and forgives the remaining upaid amount, which can be less expensive for the lender than going through with the foreclosure.

* Deed in lieu of foreclosure. If there is no way you can save your home, you can avoid having the foreclosure on your credit history by surrendering the property deed to the lender, who will then sell the property.

Other Options

If you can't afford a repayment plan your lender offers, you may want to consider filing Chapter 13 bankruptcy (although this, too, will harm your credit profile). In doing so, you may be able to temporarily halt the foreclosure process and get your lender to offer a less-stringent plan, perhaps one that allows repayment over a longer period of time.

Even if foreclousre is imminent, your lender will more than likely be willing to call it off if you come up with enough cash to cover the outstanding debt. Perhaps a relative or close friend can come to your rescue, or you can sell some other assets you own. If so, the lender may be willing to reinstate the loan with its original terms.

If you have any further questions or concerns, don't hesitate to give me a call.

Mark Rieger, 541-480-7441