Avoiding Foreclosure Tips
1. DO NOT IGNORE MAIL FROM YOUR LENDER
If you do not contact your lender, your lender will try to contact you
by mail and phone soon after you stop making payments. It is very
important that you respond to the mail and the phone calls offering
help. If your lender does not hear from you they will be required to
start legal action leading to foreclosure. This will substantially increase
the cost of bringing your loan current.
2. TALK TO A HOUSING COUNSELING AGENCY
If you don’t feel comfortable talking with your lender, you should immediately
contact a HUD-approved housing counseling agency and
arrange an appointment with a counselor. A counselor will help you
assess your financial situation, determine what options are available
to you, and help you negotiate with your lender. A counselor will be
familiar with the various workout arrangements that lenders will consider
and will know what course of action makes the most sense for
you and your family, based on your circumstances. In addition, the
counselor can call the lender with you or on your behalf to discuss a
workout plan. By meeting with a counselor before your mortgage
payments are too far behind, you can protect yourself from future
credit problems.
A good counselor will help you establish a monthly budget plan to
ensure that you can meet all of your monthly expenses, including
your mortgage payment. Your personal financial plan will clearly
show how much money you have available to make the mortgage
payment. This analysis will help you and your lender determine
whether a reduced or delayed payment schedule could help you.
Also, a counselor will have information on services, resources, and
programs available in your local area that may provide you with additional
financial, legal, medical or other assistance that you may need.
To find out more about HUD-approved housing counseling agencies
and their services, please call (800) 569-4287 on weekdays between
9:00 a.m. and 5:00 p.m. ET (6:00 a.m. to 2:00 p.m. PT). You can also
get an automated referral to the three housing counseling agencies
located closest to you by calling (800) 569-4287.
Such agencies provide free, or very low-cost assistance.
3. PRIORITIZE YOUR DEBTS
For the unemployed, getting by will require a new, tightened budget.
Prioritize your bills and pay those most necessary for your family:
food, utilities and shelter.
Failing to pay any of your debts can seriously affect your credit rating.
However, if you stop making your mortgage payments you could
lose your house. Whenever possible, any income available after paying
for food and utilities should be used to pay your monthly mortgage
payments. If your employment income has been stopped or reduced,
first consider eliminating or reducing your other expenses
(such as dining out, entertainment, cable, or even telephone services).
If that does not provide enough income, consider using other
financial resources like stocks, savings accounts, or personal property
that may have value like a boat or a second car. Take any responsible
action that will save cash.
In addition to speaking with your lender, you may want to contact a
nonprofit consumer credit counseling agency that specializes in providing
help in restructuring credit payments. Credit counselors can
often reduce your monthly bills by negotiating reduced payments or
long-term payment plans with your creditors. The majority of credit
counseling agencies are reputable and provide their services free of
charge or for a small monthly administrative fee tied to a repayment
plan. Beware of credit counseling agencies that offer counseling for
a large upfront fee or donation.
When you call a consumer credit counseling agency, you will be
asked to provide current information about your income and expenses.
Make sure you ask if the agency has a charge before you
sign any documents!
4. PRESERVE YOUR GOOD CREDIT
First and foremost, if you can keep your mortgage current, do so.
However, if you find that you are unable to make your mortgage
payments, you may qualify for a loan workout option. Check with
your lender to find out which of these options may be available.
5. IF YOUR PROBLEM IS TEMPORARY, CALL YOUR LENDER
• Reinstatement: Your lender is always willing to discuss accepting
the total amount owed to them in a lump sum by a specific date.
They will often combine this option with a Forbearance.
• Forbearance: Your lender may allow you to reduce or suspend
payments for a short period of time after which another option
must be agreed upon to bring your loan current. A forbearance option
is often combined with a Reinstatement when you know you
will have enough money to bring the account current at a specific
time in the future. The money might come from a hiring bonus, investment,
insurance settlement, or a tax refund.
• Repayment Plan: You may be able to get an agreement to resume
making your regular monthly payments, in addition to a portion of
the past due payments each month until you are caught up.
If it appears that your situation is long-term or will permanently affect
your ability to bring your account current:
Mortgage Modification: If you can make the payments on your loan,
but you do not have enough money to bring your account current or
you cannot afford the total amount of your current payment, your
lender may be able to change one or more terms of your original loan
to make the payments more affordable. Your loan could be permanently
changed in one or more of the following ways:
• Adding the missed payments to the existing loan balance.
• Changing the interest rate, including making an adjustable
rate into a fixed rate.
• Extending the number of years you have to repay.
6. IF KEEPING YOUR HOME IS NOT AN OPTION CALL YOUR
LENDER
• Sale: If you can no longer afford your home, your lender will
usually agree to give you a specific amount of time to find a
purchaser and pay off the total amount owed. You will be expected
to obtain the services of a real estate professional
who can aggressively market the property.
• Pre-Foreclosure Sale or Short Payoff: If the property’s sales
value is not enough to pay the loan in full, your lender may
be able to accept less than the full amount owed. This option
can also include a period of time to allow your real estate
agent to market the property and find a qualified buyer.
Monetary help may also be available to pay other lien holders
and/or help toward paying a few moving costs.
• Assumption: A qualified buyer may be allowed to assume
your mortgage, even if your original loan documents state
that it is non-assumable.
• Deed-in-lieu: Your lender may agree to allow you to voluntarily
“give back” your property and forgive the debt. Although
this option sounds like the easiest way out for you, generally,
you must attempt to sell the home for its fair market value for
at least 90 days before the lender will consider this option.
Also, this option may not be available if you have other liens
such as judgments of other creditors, second mortgages,
and IRS or State Tax liens.
Avoid predatory lenders, and/or lending scams. Deal only with
banks or institutions you are familiar with.
Many mortgage lenders will bend over backwards to assist you so
that you can work things out, and you won’t lose your home.
Believe it or not, lenders DO NOT want your home!
Foreclosure is very expensive and time consuming for your bank or
mortgage company.
By moving now, seeking help, and working with your lender, you can
save yourself a lot of trouble, embarrassment and heartache.
On the following page is a list of lenders that will work with you.
If you’re lender is on the list, CONTACT THEM AT ONCE!
Work It Out With Your Lender
Many people allow their houses to be sold to a stranger on the courthouse steps without ever talking to their lender about the problem. Your lender does not want this foreclosure any more than you do (see below), but they will NOT automatically put you into a program to stop the foreclosure – you must call and ask! If you have not called your lender, now is the time.
The earlier you call, the better. If you have already called them without success, finish this chapter and call them again; sometimes you can get another person who will be more sympathetic or flexible. If you’re only one or two payments behind, and this is your first delinquency, they will almost certainly put you on a payment plan to get you caught up. I’ll say this again - do not procrastinate in calling your lender! If you wait until they have started the official foreclosure process and documents have been filed with attorneys, things get more expensive and more complicated. But no matter WHEN you are in the process, it never hurts to call, and try to work something out.
Also please notice, I said, “the earlier you call” – meaning that it is best to not leave the negotiating in someone else’s hands. Your lender wants to know that you are responsible and interested enough to personally call and be the one to negotiate. In the previous chapter we discussed “loss mitigation consultants” that will offer to “negotiate on your behalf” for a fee. These are nearly always a waste of money. Your mortgage company wants to hear from you, not a consultant, and they will be far more motivated to work with an interested homeowner than a for-hire consultant. After you finish this chapter you will have the all the knowledge you need to work out a deal with your lender.
The Big Secret Revealed
Before we go any further, you need to understand a few things about your mortgage company and the person you are calling.
1) First, and foremost…the “dirty little secret” we were talking about earlier. Here it is: Your lender does NOT want to foreclose on you, and they do NOT want to own your house. They are in the business of making loans, not owning and selling houses. And furthermore, they are in business to MAKE money, not LOSE money, and if they foreclose on your house, they are going to LOSE money - probably a LOT of money. The house will sell at a discount price, and they’ll have attorney fees, Realtor fees, court fees, not to mention they haven’t gotten a payment on their loan for several months. They will try ANYTHING to avoid doing all this, but you do have to ask nicely.
2) The person on the other end of the phone is not your enemy. They’re doing their job. It’s a crappy job and they probably hate it. You need to be respectful, humble, and gracious at ALL times. Call them “sir” or “ma’am”, and say “please” and “thank you”. Most of the people they deal with are rude, evasive, and lying. Distinguish yourself from “those” people and the person on the other end of the phone might go to bat for you. Relate to them as another person. Ask about the weather. Ask if they’ve finished their Christmas shopping or have plans for the upcoming holiday. Mention your kids (and ask about their kids). Don’t sound fake when you do this - be sincere, and if they don’t respond, then drop it and just go back to being extremely courteous. But the more you can get them to like you and relate to you, the better off you are.
Okay, take a deep breath….now let’s get prepared to call your lender!
VA (Veteran’s Administration) Loans
If you have a VA loan, you may be in luck! Their Loan Service Representatives can provide financial counseling and help to get you back on your feet. Additionally, the VA has many programs that are not available to non-VA mortgage holders. For example, in some cases they will “refund” a loan, where they basically give you some time to get back on your feet. I don’t have any personal experience with the VA but I have heard many success stories. Call 1-800-827-1000 and ask for the phone number of the Loan Service Representative in your area.
FHA (Federal Housing Association) Loans
If you have a FHA loan, you may be eligible for a one-time payment from the FHA Insurance Fund. The FHA helps homebuyers get a loan with easy terms, and then insures the loan to make it more attractive to mortgage lenders. If you are in default, you need to see if you qualify for help from this program! To qualify, you must be able to prove that you can begin making full payments, and your loan must be between 4-12 months behind. (NOTE: in most states, foreclosure proceedings begin when you miss your third payment, so you need to act quickly!) If approved for this program, the FHA will make you an interest free loan to allow you to get caught up on your mortgage. Like any other lender, they will place a lien against your property and the loan will have to be paid off whenever you sell your home. This is a very attractive program – if you have a FHA loan be sure to ask your lender about it immediately.
Prepare for the call
Get a pad and pen handy to take prepare for your call, and to take notes during the call. You must document every detail of every conversation you have with anyone at your lender. Write down the date and time each call begins and ends, who you talked too, and what was discussed. Once you determine who your loss mitigation contact is, try to communicate only with them if possible, to reduce the possibility of miscommunication.
Before you call, take a few minutes to prepare. On the first page, draw a line down the middle and write “Income” at the top of the left column and “Expenses” at the top of the right column. Now, write down all your income sources and the corresponding amounts in the left column. In the right column, do the same with your expenses in the right column. It may help to review your bank or credit card statements to help you remember what you spend money on. Don’t forget all your loan payments, car payments, gas, groceries, insurance, credit card payments – EVERYTHING. The reason you are doing this is because the mortgage company representative is likely going to ask you all of this information to determine whether you can afford a forbearance or repayment plan. Carefully analyze these numbers, and make sure that there is room in your budget. You really want to be prepared for these questions with accurate numbers. Make sure you are giving your lender numbers that will make them believe you can make your payments on whatever plan they are working out for you. If they don’t believe you can make the payments, they might not approve the plan. Don’t rush through this process.
You may be asked questions like “what is the reason you’ve fallen behind in your payments?” Think about your answers. Don’t write down a script to read to them, you want to sound natural when you are talking, but know what you’re going to say. Tell them the truth - I lost my job, my spouse is in the hospital, my dad passed away, WHATEVER. Tell them you want to make your payments but are just having a temporary problem. Explain that things will be getting better soon and tell them why. (My spouse is back at work, our tax refund is coming in, whatever.) Think through all of this before you get them on the phone so you’ll know what you are going to say.
Make the Call
Call the customer service number on your mortgage statement and ask to speak with loss mitigation. At some companies the first person who answers may be able to help you, but most lenders have a dedicated loss mitigation department to work with borrowers who are behind on their payments to help them avoid foreclosure. If you don’t ask for this department right away, you might end up going through your entire story twice – a waste of time for you and them!
When you get through to the loss mitigation representative, be sure ask for their complete contact information, including name, mailing address, direct phone number or extension (to hopefully keep you out of the queue if you have to call back), fax number, and email address. You might not get all of this but you should ask for it. Not only does it show you are engaged and interested in solving your problem, but you should follow up with a fax or written letter summarizing every call.
Be sure to use their name when you are talking with them – you want to show respect and get them to relate to you on a personal level. In this example, we’re going to pretend his name is John. After you have verified all your personal information, say these magic words: “John, I’m in a temporary, bad situation and I NEED YOUR HELP. I’m behind on my payments, and I want to get caught up.” Now, in a few sentences explain your situation (lost job, medical bills, etc.) and then end with “…What can you do to help me?” Make sure you explain why the situation is temporary and things are better or are going to get better soon. If your situation is permanent, your lender may not be as eager to help you – be persuasive, sell your case and make them want to help you. Now shut up and listen! See what their offer is, if they make one. If they don’t, be prepared to ask.
The first option they are likely to suggest is a forbearance agreement. Your mortgage company is likely to consider agreeing to a forbearance agreement if they have reason to believe that your situation is temporary, and that you will have the money to make up your missed payments at a specific time in the near future. Be prepared to tell them the source of your funds – a bonus, loan, tax refund, etc.
You may be allowed to make no payment or a partial payment with the understanding that you will pay the balance of the past due amount by a specific date. If they don’t offer, ask:
• ”John, my cousin told me that he was behind on his payments, and his mortgage company let him pay interest only for a few months and tack those payments onto the end of the loan. Is that possible?”
Another common option is a repayment plan, where the mortgage company allows you to make a partial payment on your past due amount along with your normal monthly payment for several months until you are current. To oversimplify it, let’s just say your mortgage payment is $1000 and you’re two payments behind ($2000). They might let you repay the $2000 over the course of six or more months by adding 1/6 of the amount, or $333.33 to your normal $1000 payment. For the next six months, you would pay $1333.33. After that, your payment would go back down to your normal payment of $1000.00. Ask:
• ”John, my friend at work said his mortgage company let him just pay a little more every month for a few months until he had caught up, can we do that?”
Yet another possibility is a loan modification. In this scenario you and your mortgage company agree in writing to permanently modify the original terms of your note to make the payments more affordable. Some common loan modifications are adding the missed payments to the existing balance, adding months or years to the length of the note, and transforming an adjustable-rate mortgage into a fixed-rate mortgage.
This is important: Be realistic about what you can afford, and don’t agree to a plan that you are not going to be able to keep. If you work out a plan that is not within your real budget you’re going to be back in foreclosure before long. If for some reason you can’t follow through on your agreement, stay in communication with them, but don’t expect them to be as sympathetic the second time. If a pattern develops where you agree to payments and then don’t make them, your lender will quickly abandon any work-out agreements and proceed to foreclosure. Say what you’ll do, then do what you say.
If you come to an agreement with the loss mitigation representative they may fax or mail a copy of the agreement for your signature. Be certain the written agreement is the same as what you discussed on the phone, then sign it immediately and submit it back. If you are faxing, make sure to get a fax confirmation sheet. If you are mailing it, send it certified mail, return receipt requested. After a few days, call your representative back and make sure they acknowledge receipt of your signed agreement. If they don’t send something in writing, then you should send them a confirmation letter. Fax or mail (certified mail, return receipt requested) it to the address your loss mitigation representative gives you so you have record of the agreement. This doesn’t have to be anything fancy, just “Dear John, This letter confirms the conversation we had on xx/yy/zz regarding my loan 1234567. We agreed I will make payments as follows….”
Postponing the Sale
In some states, the foreclosure process happens so fast it is hard to come up with and finalize a solution before the Sheriff’s Sale. In some cases, your lender may agree to delay the Sheriff’s sale to give you time to come up with your payments or sell the house, but realize that this costs them additional legal fees and you will have to provide written proof in most cases.
In judicial foreclosure states, you may succeed in getting the court to order a delay of your sale, even if your lender will not agree. You will have to write a letter of adjournment to the court where you spell out exactly why you are requesting the delay, and be prepared to provide documentation. State laws vary, and the format can even vary from court to court, depending on how that particular judge prefers it. You should contact your court or a local attorney to determine the exact format.
For example, if you have money coming from a retirement plan or tax refund, you might have to give them copies of the documents showing that you have this money coming, and when. Or if you are selling your home and have a contract in place, but the buyer needs more time to close the sale, the lender will probably be willing to work with you. Remember, they don’t want your house – they want their money!
If you just can’t do it…
If you just don’t feel comfortable calling and negotiating with your lender, or if you have tried and were unsuccessful, don’t give up hope. The U.S. Department of Housing and Urban Development (HUD) has a network of counselors who may be able to help, and even negotiate for you. You can call them at (800) 569-4287 or check on the web at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm for an agency near you.
If you prefer to enlist the help of a private organization, there are many available that will help for a fee, but again I stress, you must be very careful not to fall prey to a scam artist here. Ask for references and call those references yourself; make sure this organization is legitimate and has helped other people. Call the Better Business Bureau in their area and see if they have a record – good or bad. You may check the resources page at http://www.stop-foreclosure-manual.com/resources.html for links to organizations that are known to be legitimate.
Fire Your Lender! (Refinance!)
If you are unable to get the lender to work with you on any sort of payment arrangement or forbearance agreement, you should immediately see if you can refinance the property. A refinance loan is a new loan that pays off your old loan completely. The old lender goes away and you start with a clean slate with your new lender. Since your relationship with the old lender has soured, this may be a very attractive option!
Once again, keep your eye on the calendar. There may not be time to refinance if you are already approaching the sheriff’s sale. For example in my state of Texas, from the time the foreclosure is posted to the sale date is only three weeks. It may be difficult to close a loan in three weeks – but worth a try. In fact, if your loan is approved you may be able to get your current lender to delay the sale to give you time to close, but you will likely have to provide sufficient documentation that you are working with another lender.
In any case, it is important that you continue to work on other solutions simultaneously. If the refinance doesn’t go through, you want to have a back-up plan in place. Don’t put all your eggs in one basket. More than one homeowner has seen a refinance fall through at the last minute and had their house auctioned at the sheriff’s sale before they could come up with another solution.
If you can refinance your home, your problems with your lender go away because THEY get paid off and go away. You’ll then have a new loan with a new lender. You’ll probably get to skip a month’s payment as a bonus. (I understand many folks in the mortgage business refinance their house every November so long as interest rates aren’t rising, then they use their December house payment money to pay for Christmas presents and a vacation. Not bad!) Heck, depending on the interest rate on your original loan, this may be a great deal for you anyway - your payment could even go down.
Loan-to-Value
A key factor in your ability to get a loan, especially if your credit is damaged, is the Loan-To-Value (LTV) ratio. If you have a low enough LTV, not only will you be able to get a loan easier, but you may be able to “cash out some equity.” Equity is the difference between the value of the house and the amount you owe on it. Here are two examples of how equity in your house could increase.
1) You bought your house for $100,000. It is worth $100,000 today, but in the course of making payments over the past several years, you have paid off $10,000 of the principal, so you only owe $90,000 and have $10,000 equity in your house. $90,000 / $100,000 = .9, so you have a 90% LTV.
2) You bought your house for $100,000. The value of your home has increased to $120,000 today, and in the course of making payments over the past several years, you have paid off $10,000 of the principal, so you only owe $90,000 and have $30,000 equity in your house. $90,000 / $120,000 = .75, so you have a 75% LTV.
Thus, if real estate values in your area are increasing, you may have built up some equity in your home without even knowing it. Ask your new lender “How much equity can I cash out?” They might say none, but if they let you, why not get a little extra cash so you can have money to make the first few house payments or other expenses for a few months? Be responsible here - don’t cash out $20k in equity and take the family to Europe for the summer. But if you have the ability to cash out some equity, do so. Once you’re back on your feet, if you want to take the extra money out and pay it towards principal on the loan, you can do so.
Debt-to-Income
Another important ratio that your lender will be interested in is your Debt-To-Income (DTI) ratio. This is the ratio of how much you have to pay for your expenses and bills to how much income you bring in each month. The historical figure that mortgage lenders have required for a loan to be approved is a 36% DTI. If you have much higher than that, you may have to look to private lenders for a loan.
I have two further suggestions regarding refinancing your home:
1. Get SOMEONE who understands mortgage loans (your banker, cousin, friend, dad, etc) to review the terms of your new loan before you sign on the dotted line. You need to UNDERSTAND what you are signing and the ramifications to your payment, interest rate, payoff amount, loan term, etc. Your NEW lender is not the best person for this, because your contact is probably earning a commission on closing your loan, and they may not give you 100% unbiased information. Look before you leap!
2. If you cash out some equity, go to the bank and open a separate savings account. Deposit in the savings account, NOT your checking account! It will disappear out of your checking account in no time! Withdraw that money ONLY if you really need it for your house payment, food, etc. Don’t spend it all and find yourself back in this mess again!
Get the Facts Early
When working with a company to get a refinance loan, be sure to ask early on in the process for a realistic, good-faith estimate of their fees and what the interest rate will be. In the sub-prime market (if that is where you are at, and you probably are if your credit is damaged) it is normal to see high interest rates, but what you don’t want are surprises at the closing table. Some lenders charge exorbitant loan initiation fees or closing costs to try to mask the true cost of the loan. Be sure to let them know you want to know how much all of that is going to cost up front, and that you do not want any surprises at the closing table. You should also get the name, phone number, and email address of your closing agent from the lender. The closing agent will work for a local attorney or title company. Contact the closing agent and ask them to fax or email you a copy of the preliminary closing statement just as soon as it is ready. Ask them to send a new copy any time there are changes throughout the process. The closing statement is called the “HUD” in the business, because everyone uses the HUD-1 Settlement Statement provided by the U.S. Department of Housing and Urban Development. That form breaks out exactly where every penny goes in a real estate closing.
Lenders
For a list of lenders, please see the resources page at: http://www.stop-foreclosure-manual.com/resources.html.
If you have decent credit but have just fallen on hard times recently, go to an online service like eLoan and make them compete for your business. If your credit is not-so-hot (what lenders call “sub-prime”), try Countrywide Home Loans. You can fill out the application on their site from the privacy of your home and not have to talk to any human until later. Remember, too many credit apps in a short period of time will hurt your credit, so just pick one or two and see what they can do for you.
Another option is to try a company called Abacus Credit & Loan. Abacus maintains a database of sub-prime lenders, including many who will loan you just the amount for your back 3-4 payments. According to their web site, they have been in business since 1998, they specialize in helping people with terrible credit – in fact they guarantee they’ll get you a loan.