Staving Off Foreclosure
By Teresa Ambord
Here's a scary word: foreclosure. To someone who has poured years of mortgage payments and sweat equity into their home, the possibility of hitting hard times and losing it all is chilling. If your house is foreclosed upon, not only will you lose all of your equity, but chances are, you'll have a big fat tax bill too.
In the 1990's our economy experienced the biggest economic expansion in history. Prosperity seemed to be everywhere. But an unintended and unfortunate consequence was that credit was easy to get, and so...we got it. Between 1990 and 2000, the average American household increased its debt about 19 percent, and decreased its savings almost eight percent. And delinquencies, followed by foreclosures were the natural result. America had gone credit happy.
Mistakes to Avoid
Experts say that, when hard times hit, many of us respond in exactly the opposite way that we should. Here's what they recommend:
- Pay the mortgage first. Let the credit cards wait. Credit card companies are aggressive about collecting, so we tend to pay them first. They might be bolder, but they have less power to hurt us than our mortgage holders. Falling more than 30 days behind in your mortgage payment is begging for trouble.
- Know what "late" is to your lender. There is usually a 15-day grace period after the due date.
- Don't fall for a scam, like a payday loans or debt removal programs that may only dig you deeper in the hole.
- Contact your lenders as soon as you smell trouble, but especially your mortgage holder. The biggest mistake people make is hiding.
- Restructure the way you pay your bills, making the mortgage payment priority. For example, if you get paid weekly, that's usually four paydays per month so save one quarter of each mortgage payment out of each check.
In the Meantime...There's Hope
In the late 90s Congress began to pressure some lenders (Fannie Mae, Freddie Mac and FHA) to work out problems rather than rushing to foreclose. The result was loss-mitigation programs that employed solutions such as these:
- Borrowers were allowed to add the missed payments onto their loan balance, and then pay off the arrearages by small additions to their monthly payments.
- Rewriting the loans to reflect the borrower's changed circumstances, whether through temporarily lower payments, or a decreased interest rate, or by waiting to collect the unpaid amount if the house is later sold.
In 2002 alone, FHA saved billions of dollars by working out the problems with borrowers, rather than foreclosing. But the key is, communicate with your lender, don't hide.
Other Possibilities to Ask Your Lender About
- Escrow account: A debt counseling center might be able to negotiate with a lender to open an escrow account. As you make payments into the account, the lender can receive the accumulation, reducing the amount you are in arrears. This not only pays down your debt, but restores your credibility.
- Loan restructure: This would essentially rewrite the loan. If you've paid on your home for five years, leaving 25 years of payments, you might be able to clear the amount past due by having the loan written back up to 30 years, and maybe at a lower monthly payment. You'll lose your five years of equity, but you won't lose your house.
- Equity: If you have at least 15 percent equity in your home, it might be possible to restructure your mortgage to roll the amount you are in arrears back into the loan.
- Bankruptcy: As a last resort, filing bankruptcy will halt a foreclosure, at least temporarily.
The bottom line is, if you think you could lose your house, you don't have to just roll over and resign yourself to it. There's more help out there than ever before. Talk to your lender first and ask what can be done. They might surprise you.