How to Avoid Foreclosure
October 26, 2007 -- Across the nation, houses are foreclosing at an alarming rate. If you are facing foreclosure, or have lost a home to foreclosure, the experience can be devastating. It will affect your credit for the next seven years and make it exceedingly difficult to become a homeowner for a second time, or even a renter. If you are facing the possibility of foreclosure, it is essential that you educate yourself, know your rights, take advantage of resources available to you, and become familiar with the process of foreclosure.
The process of foreclosure gives ownership to the bank or lending institution. Foreclosure occurs when a homeowner defaults because they cannot make mortgage payments on their house. The bank or financial institution that holds the mortgage note may then foreclose on the property. "It's estimated that up to half of all borrowers who default on their loans will actually lose their homes to foreclosure." (ABC News, May 10, 2006)
Tip One: HUD recommends that you do not ignore the problem:
"The further behind you become, the harder it will be to reinstate your loan and the more likely that you will lose your house."
Tip Two: HUD advises that you should:
"Contact your lender as soon as you realize that you have a problem. Lenders do not want your house. They have options to help borrowers through difficult financial times."
Foreclosure is costly for lenders and mortgage companies. Lenders have incentive to work things out with you, so ask them how they may be able to help. If you are only one or two payments behind, lenders may have more options available to help you. For example, a lender may be able to change the terms of the loan to make monthly payments more affordable. Also, a lender might consider reinstating your loan if you are able to make scheduled payments again or offer a one lump sum to bring your loan current.
Tip Three: HUD advises that you:
"Open and respond to your mail from your lender."
Foreclosure prevention options will be included with the first notices about foreclosure from the lender, and information regarding pending legal action. If you do not talk to your lender, they will start legal action leading to foreclosure.
Tip Four: HUD advises that you:
"Know your mortgage rights. Find your loan documents and read them so you know what your lender may do if you can't make your payments. Learn about the foreclosure laws and time frames in your state (as every state is different) by contacting the State Government Housing Office."
Tip Five: According to HUD, you should:
"Understand your foreclosure options."
Some of those options might include eligibility for relief such as disaster relief, and the Service Members Civil Relief Act, which affects military homeowners. If you are facing money problems due to job loss, retirement, changes to job hours, serious illness or death in the family, divorce or separation, you may want to look at eliminating unnecessary spending and reaching out to local organizations that will help you get through hard times.
"Contact a HUD-approved housing counselor."
Housing counselors and credit counseling agencies can help you sort out your finances, organize a budget, understand the law, and represent you in negotiating with the lender. They can also put you in touch with local services or programs that provide legal, financial, medical or other kinds of support. On HUD's web site, you can find an approved housing counselor or agency.
"Prioritize your spending."
Your mortgage payment should take top priority over all bills, including credit card bills, with the exception of healthcare. Sit down and take a look at what you are spending your money on, and compare the costs against your income. Can you truly afford your monthly payments? Are you spending too much in other areas unnecessarily? You may be able to cut costs by getting rid of optional spending such as memberships, cable bills, cell phone bills, dining out and entertainment. Get creative.
"Use your assets."
Explore the option of cashing out on assets such as cars, jewelry, stocks or savings, life insurance policies, and any other financial resources that you may be able to use. Efforts to save your home might be noticed by the lender and help you to keep your home.
Tip Nine: HUD advises:
"Avoid foreclosure prevention companies."
While some companies offer to negotiate your loan with your lender, in the long run you may end up paying more money to them than the cost of the loan. Foreclosure prevention companies often charge hidden costs for information and services that a housing counselor will provide at no cost. "You don't need to pay for foreclosure prevention help--use that money to pay the mortgage instead," advises HUD. The Federal Housing Government warns that:
"... 'dishonest' or 'predatory' lenders do exist and engage in lending practices that increase the chances that a borrower will lose a home to foreclosure. Beware especially of those who make high risk second mortgages. Other abusive practices include:
- Making a mortgage loan to an individual, who does not have the income to repay it.
- Charging excessive interest, points and fees.
- Repeatedly refinancing a loan without providing any real value to the borrower.
Borrowers facing unemployment and/or foreclosure are often targets of predatory lenders because they are desperate to find any 'solution.'" (Beware of predatory lending schemes, FHA)
"Don't lose your house to foreclosure recovery scams!"
According to the FHA, an equity skimming scam is when "a 'buyer' approaches you offering to repay the mortgage or sell the property if you sign over the deed and move out--usually leaving you with the debt and no house. Signing over your deed does not necessarily relieve you of the responsibility of paying the loan." Be careful of offers from companies that seem "too good to be true," and do not sign anything that you do not understand. Also, do not pay counseling agencies for services that you can probably get for free. You can call a HUD-approved foreclosure housing agency counselor toll free at (800) 569-4287 or TDD (800) 877-8339 for more information.
Not everyone facing foreclosure loses their home. Some are able to sell their homes before foreclosure; others arrange a payment plan with their lender. In most states you can file for bankruptcy which will stop foreclosure proceedings. For more information on home ownership and foreclosure, see the HUD web site.