From January to June of 2019, lenders have foreclosed 296,458 American homes according to a report by Attom Data Solutions.
While this number is lower than the 2017 figures, it’s still a lot of homes.
Imagine the hundreds of thousands of families losing their homes because they couldn’t pay their mortgage.
What Are The Popular Reasons For A Foreclosure?
Majority of the homes that fall into foreclosure is because of the owners’ fault. They default on their mortgage loans by stopping to make full monthly payments. Why does this happen?
One reason is because of overextending – the owner bought a home that’s is worth more than he can reasonably afford. It could also be that the lender offered a loan to a buyer who is not qualified for that amount or someone who should not have received a home loan that size in the first place. You should note that before the recession, many lenders awarded loans left and right without verifying the borrower’s income. It came as no surprise that they later discovered that many of them pretended that they were earning more money than what they actually did.
In other cases, the owner suffered a financial crisis because of unexpected events in his life. Some suddenly lost their job or had serious medical and hospital expenses that diminished their ability to meet not only their mortgage payments but other bills as well.
There are also cases where the owner took out a second mortgage and spent the proceeds on non-income generating assets. This resulted in them having more liabilities to pay – but with a decreased net worth, it also crippled their ability to repay on the second mortgage.
Some owners also accepted an adjustable-rate mortgage, expecting they will be able to meet their monthly payments if the rate goes up. Under Federal laws, the lender must disclose the maximum interest rate that the borrower should pay under the terms of their adjustable-rate mortgage note. In a lot of instances, the owners bite the offer of low introductory rates and enjoy them for a while. But eventually, when the rates increase, they discover that their monthly payments are beyond the family budget, so they fall into arrears.
It is commonplace for homeowners to realize that they are already “underwater” on their mortgage (we will discuss this below) and decide walking away from their loan is the easiest recourse.
As we have shown you, there are many reasons why owners fail to meet their mortgage payments.
When Will The Lender Initiate The Foreclosure Process?
The process of foreclosure gets its earliest signal to initiate when your loan payment becomes overdue by 16 days. It is during this point that alarm bells will sound at your lender’s office and they will try to get in touch with you to work out a repayment schedule to update your account.
If you become 30 days delinquent in your first payment and your next month’s payment appears to be hazy, the lender will start collection attempts more seriously.
If you are not speaking with your lender/servicer and still go on missing mortgage payments, they will hit you with a 60-day late, and later a 90-day late. These will have a big negative impact on your credit, and at this point, you start to lose your chances of refinancing or getting a forbearance plan.
Once you cross the 90-day late mark, the lender will already send you a Notice of Default (NOD). The NOD basically tells you that you have 30 days to bring your account up-to-date, appear in court, or face the sad process of foreclosure. If you let the 30 days pass without appearing in a court of making your payments current, the court can already schedule an auction so they can sell your home within 7 days.
Best Ways To Avoid Foreclosure
Depend on your situation, there are a couple of things you can do in order to avoid home foreclosure:
Don’t Deny Your Mortgage Problem
Read the first notices that the bank will send you because you can find good information about your options to prevent foreclosure and avoid making the situation more complicated. Subsequent mailings may already include important communication of imminent legal action. Your failure to open or read the mail is not an admissible excuse in foreclosure court.
Normally, your bank or loan servicer would have a forbearance plan for borrowers who miss their payments. The purpose is for you to be able to get back on track with your payments so be sure to ask and discuss with them. It is a special payment plan they come up together with the borrower to either lower the monthly payments or suspend payments so the borrower can continue to pay the mortgage. We will have more on this later.
If you can’t pay your mortgage or have not paid it, call your lender or the company that they hired to collect the payments as quickly as possible.
The majority of lenders do not want to go to foreclosure so they would rather work with you to resolve the problem. You may be able to find more options if you get in touch with them early enough. You can find their numbers on your monthly mortgage statement or payment coupon book. Let them know of your financial situation and offer to work with your lender so you can arrive at the right payment solution that’s acceptable to both parties. If your lender does not want to talk with you, you may contact a housing counseling agency instead.
Refinance Your Mortgage
If your mortgage trouble happens at a time when you’ve already built up enough equity in your home, you can easily ask your bank to refinance your mortgage for you.
Refinancing is one of the best options among the foreclosure remedies because it hardly affects your credit, you get a more affordable loan in place of the old one, and more importantly, you get to keep your house. The other alternatives below will bring down your monthly bill but damage your credit score. Nevertheless, you remain in your home.
For example, if your original loan is $250,000 and you’ve already paid off $100,000, you can get a new 30-year loan for the equity, which is $150,000 ($250,000 minus $100,000). The downside is a longer repayment period – but that’s better than letting go of your home completely.
Your first practical mission is to find ways to cut down on your daily expenses. For example, if you habitually buy a cup of coffee every morning or eat lunch out every day, they add up to a big amount every month. Look for the optional expenses that you can eliminate for the moment: gym membership, cable TV, and other forms of entertainment. If there are regular payments that you can’t get rid of, like credit card debts, you might try to work on lowering the monthly payment. There are many expenses that you can cut back or even totally eliminate for which the savings can go to your loan payments.
If you’ve set aside money in a retirement fund, think about taking an early withdrawal. If you have Roth IRA, your withdrawals will be tax-free and penalty-free. Yes, you might sacrifice a little on your retirement target but you can catch up later. You must avert the present crisis now and go back on track once the house payment problem has passed.
There’s another trade-off for early withdrawal on your retirement plan. You will pay taxes and penalties when you withdraw from your traditional IRA or 401k plan before maturity. However, keep in mind the benefit that you will get: being able to keep your home is worth the extra costs.
Corollary to this, you should start looking for ways to make extra money to pay for your regular expenses. You can do some freelance work online and do it while you’re at home. A few hours working on your computer could mean some regular extra dollars to tide you over. Or ask if your boss is willing to give you some extra shifts or overtime hours at work. If that’s a dead-end, check if you can get a second job or a side income from doing things like driving for Uber. Turning one of the spare rooms into an AirBnB or letting it out could also bring you extra income.
Here’s the thing: under the Federal and state laws, your lender can not proceed with foreclosure proceedings when your mortgage is under a loan modification review.
A loan modification is a process where the lender agrees to adjust the terms of a loan to make it more affordable to the borrower. They could lower the payment, rate, loan amount, or do a combination of these factors.
You might have heard of the Making Home Affordable (MHA) Program, a government initiative that helps homeowners in trouble to avoid foreclosure by offering loan modification programs. Many MHA loan modification packages can help homeowners to lower their monthly mortgage payments or find a substitute option to get out of their mortgage.
People who try to avail of loan modification programs are mostly the ones who are experiencing financial hardships. A loan modification application is similar to a normal loan application. You will have to submit a lot of documentation to show and explain exactly what caused your hardship, how long you expect it to remain, what you are currently earning, and what your realistic future income might be.
Mortgage Forbearance Agreements
A mortgage forbearance agreement is a relief that the lender gives to the borrower when the borrower is having a hard time meeting his or her payments.
Under the agreement, the lender will accede to reduce or even suspend mortgage payments for a time and consent not to initiate a foreclosure during the period they will agree upon. At the end of that period, the borrower should resume the full payment, plus any additional amount to bring his account current on his missed payments, including amounts for the principal, interest, taxes, and insurance. The terms of the agreement will depend on lenders and the borrowers’ situations.
But remember that a mortgage forbearance agreement is not a long-term solution for delinquent borrowers but more of a temporary solution for borrowers whose financial problems may also be temporary. Usually, they are the ones who encounter financial difficulties because of sudden unemployment, health problems, or similar family emergencies. Troubled borrowers with more fundamental problems (such as those who opted for an adjustable-rate mortgage but could not afford the increased rates) must look for remedies aside from a forbearance agreement.
A forbearance agreement may spare a borrower from undergoing foreclosure until his or her financial situation improves. Some compassionate lenders may even extend the forbearance period in case the financial situation of the borrower does not improve by the end of the forbearance period.
Set a Repayment Plan
Under a repayment plan, you agree to catch up on your missed payments over a certain period while at the same time keeping your current payments on track. Most lenders will easily agree to this scheme so it’s the easiest to negotiate. For it to be viable, you should be able to show that your income can cover both current payments and the makeup portions.
For example: If you become four months behind on your $3,000/month payments (for a total of $12,000), offering to pay an additional $1,500 a month over the next 8 months would bring your account to current status.
Most lenders will agree to a repayment plan that spans three, six, or nine months. They don’t usually offer anything longer because, from experience, most borrowers will find it burdensome to make largen-than-usual payments over a long period.
Sometimes the servicer can give a thumbs up for a repayment plan at once without even consulting the actual lender. But here’s the thing: the longer time it will take you to catch up, the bigger the chance that your servicer will have to get a go signal from the lender.
Short Sale Your Home
If your financial situation doesn’t look like it’s going to turn for the better soon and realistically, you know you can’t keep your home, there’s still a way to lessen the impact. You can apply for a short sale with your lender rather than wait for the foreclosure process to start. However, this is available only to borrowers whose loans are bigger than what their houses are worth.
Take note that your lender must agree to the short sale before you put up your home for sale because they must be willing to receive less than the full loan balance when you eventually sell your house. If the housing market is down and you try to sell your house, your home might fetch an amount that’s way below what you owe on your mortgage so it doesn’t really get you out of your predicament. In the case of a short sale, selling your home for less than the balance on your mortgage could be the solution. Should the lender agree, you can just sell your house, say goodbye to it – and start over again.
To illustrate, let’s say you presently owe $200,000 on your mortgage. To be able to square everything with your lender and the closing costs of $5,000 on the sale, you’d have to list the house for $205,000. But, in a slumping housing market in your area, you are not able to get any offer at all for this price.
With a short sale, you could bring down your asking price to $185,000. When you take out $5,000 for the closing, you’re left with only $180,000 to settle your old mortgage. But it’s okay because your lender will agree to accept this lesser amount as full payment for your loan because it is much better than spending money and waiting for a foreclosure process on the home to become final.
Lenders would likely accept any of the two most common short sale hardship cases. Show proof that your income is now less and therefore your home has become unaffordable and you are subject to mandatory job relocation.
Ask For a Deed in Lieu of Foreclosure
You can avoid a foreclosure and break free from high housing payments by asking for a Deed in Lieu of Foreclosure (DIL). Rather than passively waiting for a lender to foreclose on your home, you can proactively transfer the ownership to the lender. Basically, you sign the deed over, and your lender sets you free. You will no longer be under obligation to make payments.
Deed in Lieu of Foreclosure – Things to Consider
Keep in mind that a DIL is effectively, still a foreclosure although the process is faster and probably easier. It’s a simple transaction – you hand over your house, the lender cancels your debt at once. Perhaps the bigger benefit is that you spare yourself the public embarrassment of going through the long process of foreclosure. However, it will still affect the following:
- Your Credit Scores. Deed in lieu of foreclosure will damage your credit. But, looking at the circumstances, since you would probably miss a lot of your monthly payments and subsequently default on your loan, that doesn’t make a lot of difference on your credit.
- Your New Housing. With DIL, you must, of course, give up your house and move out. Yes, you’ll stop having to make payments because the bank will own the house but you must find a new place to stay.
- A Limited Relief. DIL remedies your situation with your primary mortgage lender. In case you own money to others (a second mortgage, HOA expenses, taxes, and so on), they won’t magically disappear. You will still owe that money and you should pay them too.
- File for Bankruptcy – If the bank has scheduled the foreclosure sale in the next few days, you can stop the sale immediately by filing for bankruptcy. This move will stop the foreclosure dead on its tracks. As soon as you file for bankruptcy, a provision in Section 362 of the U.S. Bankruptcy Code called “automatic stay” immediately kicks in. It is an order prohibiting any creditor and other entities from pursuing payment from the debtor – including foreclosure of assets. This injunction will halt the foreclosure activity during the bankruptcy process.
The lender’s remedy is to file a motion for relief from the stay. This means that the lender can ask permission from the court to continue with the foreclosure by lifting the stay. Even if the bankruptcy court allows this motion and permits the foreclosure to go on, there will already be a delay for at least a month or two. This could provide you with time to follow through on other alternatives to save your home or negotiate with your lender.
Important: Don’t ever think of bankruptcy as an easy way out. Yes, the law may be on your side in the fact that it will slow or stop foreclosure in some cases. But it’s always best to seek legal advice from a reliable expert before you proceed.
Observe a few basic practices to reduce your risk of having a personal mortgage crisis. Things like buying a materially less expensive home than you can afford. Setting aside money for emergencies that’s worth six months of your normal expenses.
Try to create several income streams, so if one source dries up, money won’t stop coming. Keep away from non-mortgage consumer debts such as car loans or credit card obligations. Understand how every borrowing process goes do that nobody can trick or trap you.
Your last option is giving up your house. If your debt is more than what it’s worth, the lender may allow you to sell it while forfeiting on the remaining debt. This way, your lender doesn’t have to spend so much on foreclosure and you keep your credit intact. You can also surrender your deed to the bank before your lender files for foreclosure. If your creditor agrees to your offer of a “deed in lieu of foreclosure”, as we’ve discussed, you voluntarily transfer title, vacate the house – and you forget the past and move on with your life.