How to Save Your Home from Foreclosure
The great American Dream of homeownership is what many in the United States diligently pursue after. While homeownership brings a host of benefits, no one will appeal that you take on an equal amount of responsibilities when you purchase your home. In the current real estate market, becoming a homeowner may come with little or no cash investment for what used to be a traditional down-payment of about twenty percent of the sales price of the home. The loan that is obtained by a first time homebuyer is usually a special loan designed to assist those at entry level, or those buyers who have not yet accrued a substantial sum for the down-payment.
Banks will always prefer to lend to a borrower that has more money to invest for a down payment. Typically, the desired amount is at least ten or twenty percent of the purchase price in the form of cash. Almost without exception, the banks or mortgage lenders will make special loans with very little or no down-payment to a homebuyer because the loan is usually insured or guaranteed against loss of principal by a governmental or quasi-governmental agency.
Unfortunately, first time homebuyer loans are usually the first loans that go into default in an economic downturn. Financial hardships caused by either loss of a job, accident and / or injury, chronic illness or relationship problems can turn the long thought after American Dream into a nightmare. Although in a normal economy, there are very few people that actually end up losing their homes, those in the middle of the foreclosure process can find themselves in such an emotional, as well as financial, turmoil that many do not see themselves successfully resolving the problem They have gotten into.
The following information is shared in the expectation that it will provide a path for those embroiled in this very difficult situation, and assist in providing information in order to resolve their particular financial problems. While the exact foreclosure timeline varies from state to state, for the most part general guidelines are applicable through the nation.
What You Can Do to Avoid or Stop the Foreclosure Process
The first and most important step that one can take in preventing the loss of one's home through the foreclosure process is to "communicate, communicate, communicate"! Your objective is to immediately speak to your lender and inform the lender of the situation. This first step, along with a few others, is detailed below.
Negotiate with the lender
The lender will always work with a client of the heads if the client takes the initiative to communicate any financial hardships that may have caused the default. Try to negotiate with the lender for a payment adjustment in order to make up for the missed payment or payments. It is imperative that you act quickly in order to prevent the sale of your home, because once the foreclosure process begins you only have 120 to 140 days before your house is sold. Contact your lender to explain your situation and work out a way for you to keep your house. By acting quickly you have the most time and the best chance of being able to negotiate a solution before the trustee files the notice of default. If foreclosure has already begun you must contact the lender during the 90 day period before the notice of trustee sale is posted and filed.
One of the most common causes of failure to communicate is that many homeowners facing foreclosure avoid contacting their lenders because they are upset or embarrassed. Many times the homeowner mistakenly believes the lender will not help them because they feel that the lender prefers to foreclose. In reality, the opposite is true. Banks and other lenders are primarily in the business of earning money by collecting interest on loans that they have made. Their net income is derived by having a specific process in place in order to invest and receive the interest payments. They find it cumbersome to go through the foreclosure process, and usually are not well equipped to manage foreclosed properties.
Because of this, most lenders are willing to work with homeowners because foreclosure are much more expensive for them in the long run. It forces them to allocate time and resources to an unprofitable activity. Contact your lender immediately! Do not ignore phone calls and letters from your lender. If you do not inform your lender of your situation, it will be claimed that you do not intend to pay and the legal process will go forward.
It is important to prepare well before you contact your lender. You must gather all documents supporting your income and expenses, as well as all loan account information. When you call, ask to speak to someone in the customer service department. Be upfront and honest about your circumstances and be prepared to discuss your financial situation in detail. Your lender needs to know clearly your financial situation in order to determine whether they are able to offer a solution.
Your lender should be able to then offer you one of the following options:
Loan modification: this is when the lender agreements to modify the terms of the loan. As an example, the lender may agree to extend the term of the loan or lower the interest rate of the loan. This option helps you catch up on unpaid payments by making your monthly payments affordable. Loan modification may be appropriate if you have recovered from a financial problem and can afford to make your loan payments if they are adjusted.
Repayment plan: This option allows you to catch up on unpaid payments by adding a portion of the late payments to your regular monthly payments. A repayment plan may be charged for you if you have recently reclaimed from a short- term financial problem and are now able to resume making your regular monthly payments but need time to catch up on the unpaid payments.
Reinstatement: This is when you are able to pay off the entire balance of the unpaid payments by a specific future date. Reinstatement may be appropriate if you know and can prove to your lender that you will soon be receiving a quantity of money that will allow you to bring your loan account current.
Forbearance: This is when the lender agreements to temporarily reduce or stop your loan payments with an agreement on another plan to bring the loan account current. This option stops the foreclosure process and is combined with other options, often reinstatement.
If you are uncomfortable negotiating with your lender by yourself or if you want better understanding of what options you have, contact a reputable foreclosure assistance counseling agency. When selecting an agency to work with, choose one from the US Department of Housing and Urban Development's list of approved housing counseling agencies. Beware of phony "counseling agencies" that approach you with the promise to advise you on your situation, provided that you pay a large fee for services you may very well be able to accomplish yourself!
Borrow money from family or friends
Many people tend to shy away from this as their first option. One would think that this option would be the most common-sense place to start. Many people completely eliminate this as a means to gather the funds necessary to bring the loan current simply because they are embarrassed to ask. They do not want family or friends to know that they have encountered financial difficulties, so they look elsewhere. Family or friends many times are the ones that are most committed to lending a helping hand. If they are capable, they are very likely to be very willing to help out. Oftentimes because of a homeowner's embarrassment, they are not approached until it is too late in the foreclosure process, and are unable to obtain funds quickly enough to help out. Obviously, there are situations where the homeowner's family members or friends are not approached because there are already strained relations, or they want to avoid causing any discomfort to their inner circle of friends or family.
One of the best things that I can recommend to you is that you approach the request for assistance in a very businesslike manner. By that I mean, you should look to secure their interest just as you would expect if you were the one providing the funds to someone else in trouble. The greater degree of security that you can offer them in protecting their funds, the greater probability of successfully obtaining the funds is necessary to stop the foreclosure.
Borrow from institutional lenders
A third option is to borrow from institutional lenders to bring up back payments. This can be done by refinancing, or simply by borrowing against the equity in the home. These lenders will primarily consider equity when determining approval of a loan. Equity is defined as the difference between the fair market value of the home and what is owed on the mortgage. Refinancing is when you take out another loan in order to pay off the existing mortgage. When refinancing to avoid foreclosure, you may be able to obtain a lower interest rate, a longer payment period, and / or a lower monthly payment which would make your mortgage payments more affordable. Usually lenders that become aware that you have fallen behind in the mortgage payments will shy away from lending to you, so if you expect to borrow from an institutional lender, you must act very quickly before your credit reflects any late payments. If the lender is aware that you are in default, they will probably refuse to lend, or offer a loan with much higher interest rate to account for the borrower's inability to meet their financial obligations.
Borrow from private party lenders
There are individuals that have funds to invest and are looking for a higher return on their investment than can be obtained by depositing their monies with savings institutions. These individuals are expecting a high rate of return on their cash investments, and understand that the loan that they are funding is a high-risk loan or is often referred to as a "hard-money" loan. Usually, once the homeowner falls behind in their mortgage payments, it is increasingly difficult to borrow money. These private lenders usually consider the equity in the property when making the loan. Because the borrower is behind in their payments, the lender can not look up the borrower's ability to repay in a timely manner as the primary basis for qualification. The lender looks for the security of their investment to the ability to recover it based on the property's market value and what is owed by the borrower on the property. Almost without exception, these loans carry a much higher interest rate (usually beginning at around 14 percent) than the normal home loans obtainable at banks or other lending institutions. They are, however, many times the only option left to a homeowner in foreclosure.
Sell the Home
Many times, the best solution for someone that has fallen behind in their payments is to sell the home, and theby recoup 100% of their equity minus selling costs. Unfortunately, many homeowners get caught up in the emotions of the hardship and overlook the realities of their financial circumstances. Almost as if with blinders on, they stagger about hiring for a magic solution, sometimes waiting until it is too late to come up with a rational plan. If a homeowner can reasonably assess their finances and determine that they can not carry the financial load, they may be much better off selling the property and preserving the bulk of their equity until they are again able to become homeowners.
However, they must act quickly so that their credit is not ruined by the failure to make their mortgage payments on time, or by using the bankruptcy process just to forestall the sale of the home. Do not let your equity be ate up by the high costs inherent in loans made to those in distress. Sell the home and reserve the most valuable or valuable part, rarely the equity!
File for Bankruptcy
There are two chapters dealing with personal bankruptcy; Chapter 13 and Chapter 7. The main difference between the two chapters is that Chapter 13 helps individual debtors pay off their debt with court supervision and protection while Chapter 7 eliminates, or in legal terms, liquidates, the debtor's debt. Based on this simplistic definition alone bankruptcy may seem like the simplest and best solution to your financial problems. However when considering filing bankruptcy be aware that it is not an action that simply frees you from your debt, it is a complex legal process that has weighty financial consequences. For most debtors it is not the best option and should be considered as a last resort after all other options have been investigated or attempted. Individual financial circumstances are so different that you should seek the counsel of a financial planner or accountant and a bankruptcy attorney in order to discuss your particular financial situation and the implications of a bankruptcy. If you do not have an established relationship with an attorney, I would recommend that you get two or three opinions.
No doubt, unfortunate circumstances are likely to befall many of us as we go through life. One should keep in mind that you can protect your financial health by being proactive when these problems occur. As long as you act quickly and take steps to reserve your assets, you should be able to avoid going into foreclosure. Even if you are unable to avoid foreclosure, following these guidelines should minimize the pain of the process. Seeking assistance immediately from professionals in taxation, law, and real estate will improve your chances of handling the process with a much better exit than if you try to handle the process solely on your own.