Early action helps head off foreclosure
By Sandra Block
Owning a home is an exercise in crisis management. A hard rain turns your basement into a water park. Termites inhabit your hardwood floors. A heavy metal band moves in next door.
But a growing number of U.S. homeowners are facing a far worse calamity: losing their homes. A record percentage of homeowners are facing foreclosure, and many more are falling behind on their mortgage payments, according to the Mortgage Bankers Association.
Yet just as preventive maintenance can prevent roof leaks, taking action before you fall behind on your mortgage can avert foreclosure. Some borrowers avoid talking to their lenders because they fear they'll end up out on the street. But foreclosure is a costly, time-consuming process for lenders. In some states, it can take up to 18 months.
"We don't want to foreclose," says Kim Lott, a vice president for loss mitigation at Countrywide, a mortgage lender. "When homeowners are in houses making payments, that's how we make our money."
That means you have more power than you may realize. If you're falling behind on your mortgage, or fear that you'll soon have trouble making payments, contact the lender. Your lender may suggest several alternatives, ranging from a new payment plan to the sale of your home.
A job layoff or serious illness is traumatic enough without the specter of losing your home. Talk to your lender early about ways to cope with a short-term cash crunch. Some options:
A loan moratorium. With a moratorium, also known as forbearance, your lender agrees to suspend or reduce payments on your mortgage for a specified period. Once the crisis has passed, you can arrange to increase your monthly payment until you've made up the difference, Lott says.
Loan modification. Your lender may agree to lower the interest rate on your loan, which will reduce your monthly payment. If you missed some payments, your lender may also roll those payments into your loan, says Thomas Johnson, director of default at Wells Fargo Home Mortgage.
Sometimes, a temporary reprieve isn't enough. Divorce, disability or prolonged unemployment may force you to give up your home. Even then, you should avoid foreclosure, says Karen Hiller, executive director at Housing and Credit Counseling in Topeka, Kan. Foreclosure will stay on your credit report for years, making it difficult to get another mortgage, she says.
And even if you can find a lender, you'll probably pay a higher interest rate, says Bill Emerson, chief executive of Quicken Loans.
If home prices in your neighborhood have risen, selling your home may enable you to pay off your mortgage and cover delinquent payments.
But if you're many months behind, or your home has declined in value, proceeds from a home sale may not get you out of debt, says Glen Corso, senior vice president for PMI Mortgage Insurance. In that case, talk to your lender. Possible options:
A short sale. The house is sold as quickly as possible, and the lender agrees to accept the proceeds. Even if the sale doesn't cover your outstanding mortgage, "lenders would much rather do that than go through foreclosure," Corso says.
A deed in lieu of foreclosure. If you're unable to sell your home, you may be able to arrange to hand over the deed to your lender. In exchange, your debt will be eliminated. This will show up on your credit report, but it's probably not as damaging as a foreclosure, Corso says. "An actual foreclosure means you gave up and walked away," he says.