September 16, 2007
Keep the wolf away from the door.
As people struggle to make rising mortgage payments, and the number of homes nationally entering foreclosure breaks records, homeowners are plagued by the vision that they will be thrown out of their homes.
The threat could become real if you are procrastinating, hoping for the best and ignoring monthly payments you cannot afford.
But you might be able to hold onto your home if you take the threat seriously and go into action now.
"The biggest mistake people make is waiting until it's too late," said Paul Bach, a Northbrook bankruptcy attorney.
When a person gets far behind in making mortgage payments, options dwindle. And if they are within days of losing their home -- or the point when Bach says frantic people tend to show up for the first time at the attorney's door -- a painless escape is difficult.
Instead, explore the following:
- Can you refinance?
If you have good credit, are not behind on mortgage payments, and know that your monthly payments are adjusting to a level you cannot afford, try to obtain a new mortgage.
It's probably not going to be as easy as in the past. The housing mess has caused lenders to go out of business, and remaining lenders have tightened qualifications for obtaining loans. That's one reason why it's critical to act while your credit history is in good shape.
If you are doing OK, and the clock is ticking toward monthly payments you aren't going to be able to handle, be careful not to be sidetracked by a broker who will not deliver what you need, said Gerri Detwiller, author of the "Ultimate Credit Handbook" and analyst for Credit.com.
Some mortgage brokers will drag out the loan process, suggesting that you will be receiving a loan, and then telling you days or weeks later that they cannot find a lender to grant one at an attractive rate.
Go to a bank or credit union that lends directly to individuals. Be suspect if a broker merely pulls your credit report. Instead, a serious one will be verifying your income, pulling tax forms and getting an appraisal of your home.
To make sure the deal is solid, request a lock on the loan in writing from the lender. Be aware that the recent housing mess has been tough on lenders, and even large lenders have gone out of business. So close on the loan as quickly as possible, Detwiller said.
- Seek help from your lender.
If you can't refinance to easier terms, turn to your existing lender for some relief.
You probably won't be going to the lender directly, however. Rather, you will talk to a servicer, which is the company that sends you your mortgage bills and collects your payments.
This can make the negotiations somewhat complicated. If the servicer hasn't been given the leeway by your lender to give you a break, you could have trouble.
But lenders often would rather avoid the costs associated with taking back a person's home and putting it up for sale.
Call the servicer, using the telephone number on your mortgage bill, but ask to speak with the "loss mitigation department." This is the department that would have the authority to negotiate, said Odette Williamson, an attorney for the National Consumer Law Center.
Tell them: "I'm interested in doing a modification on my loan," she said. They might also refer to it as a workout.
"There is an unprecedented push to do workouts," Williamson said.
You will tell the agent that you cannot afford the payments and you ask them to modify the payments. You might say I can afford today's payments, but not the higher ones coming. You might be able to change an adjustable mortgage into a fixed-rate mortgage with a somewhat higher interest rate. If you have missed a month or two, you might agree to pay your regularly monthly payment on time, and add a smaller increase onto the payment each month until the months you've missed are covered.
If the lender offers you a modification that you know won't solve the problem, don't agree to it, Williamson said.
"You can only go back to the well so many times," she said. "Tell them you are trying to work out a long-term solution."
And if one agent is not willing to negotiate, call back later and talk to another. If you strike out with the servicer, try going to your lender directly.
- Get help from a counselor.
To be successful negotiating with a servicer, you need to be prepared.
Before approaching the servicer, review your finances in depth so that you can tell them with certainty what you can afford, not afford, and why. That means doing a detailed budget. Add up all your monthly expenses, and look for cuts you can make. If you don't know how to prepare a budget, you can find models on the Internet.
You also can receive help from a counselor approved by the federal government. You can find housing counselors who help people avoid foreclosure through the office of Housing and Urban Development at www.hud.gov/ offices/hsg/sfh/hcc/hcs.cfm, or by calling 800-569-4287.
Besides budgeting help, these counselors can negotiate with your servicer. They will also be able to tell you whether you would be better off selling your home.
You also can find tips on negotiating through HUD and through Freddie Mac, a firm that insures mortgages, at FreddieMac.com/corporate/buyown/english/ owning/avoid_foreclosure.html. Do not delay, especially if you have been notified that your lender is starting the foreclosure process. In some states you might have only two months before your home is sold. And because so many people are struggling with adjustable-rate mortgages that have become unaffordable, HUD counselors are busy. You may have to wait as much as a month for an appointment.
Another alternative for budgeting would be a non-profit credit counselor found through the National Foundation for Credit Counseling (800-388-2227) or your local United Way.
- Selling your home.
If you can't modify your loan so it works, you might be able to get your lender to delay the auction on your home for 30 to 60 days while you try to sell your home.
"They are likely to do this if you can fax a sale agreement with a closing date," Williamson said.
Be aware that with the market glutted and housing prices falling, you might not make enough money on the sale of the home to cover your first mortgage and a second mortgage. So you could still have loan payments remaining after you sell your house.
To avoid this, Williamson suggests asking your lender early in the process to accept a lower amount than the full mortgage. If you are negotiating and the foreclosure process has begun, Williamson said to ask the lender to stop the process while you negotiate. Get any agreement in writing.
If your servicer and lender won't provide relief, you can delay the foreclosure by filing for Chapter 13 bankruptcy.
Beware of jumping too quickly into bankruptcy, but also beware of waiting too long.
Detwiller says too many people agree to payment plans through credit counselors or lenders that are too tight and end up making mistakes, such as spending retirement savings.
In Chapter 7, debts are forgiven, but the option is only available to people with modest incomes. In Chapter 13, you modify your debts, but still have to repay money in arrears.
Your future credit score receives a blemish, regardless. Both Chapter 13 filings and foreclosures stay on a person's credit report for seven years, said Rod Griffin, education manager for credit bureau Experion.
Gail MarksJarvis is a Your Money columnist. Contact her at firstname.lastname@example.org.
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