If you’re in danger of falling behind on your mortgage, or if you’re already delinquent, it’s important to know what’s ahead and what your options are. The faster you move, the more choices you’ll have about your financial future.
The timeline
30 days: Your troubles actually start as soon as you miss a single payment, however, your lender may not contact you until you’ve skipped a second payment. Your lender will report the first late payment and every subsequent delinquency to the credit bureaus. Even a single late payment can devastate your credit score, the three-digit number that lenders use to help gauge your creditworthiness. Each subsequent “late” further decreases your score, making it more difficult and expensive to get a loan or a refinance that might help your situation. In addition, lenders typically tack on late fees of 5% or more for each missed payment.
90 days to one year: Eventually, if the payments aren’t made, the lender will file a “notice of default” with the local courthouse and send you a letter saying that the foreclosure process will start unless you bring the loan current and make good the missing payments.
How quickly the notice is filed depends on the individual lender. Some hold off if you contact them to work out a payment plan or otherwise explain your situation. Others are more aggressive and start the process as soon as possible to try to protect their investment.
Usually, this notice means that the amount you owe has shot up as well, since the lender typically adds substantial fees to cover their legal costs.
The notice of default is a significant threshold, and one you’ll want to avoid if at all possible as it changes everything and once it’s crossed your options are significantly reduced.
The primary reason for that is the notice of default is generally picked up by the credit bureaus, further depressing your credit score and making refinancing the loan extremely difficult.
(In addition, the notice tips off scam artists that you’re in trouble and may be vulnerable to various “equity skimming” schemes. One common ploy: The scam artist promises to take over your payments, but instead rents out your house and keeps the rent payments as pure profit. The home goes into foreclosure, your credit is trashed and you’ve lost any equity you had in the home.)
90 days more: Borrowers typically have 90 days from the notice of default to make up the deficit before the lender sends out a “order of sale” to the local sheriff, which sets a sale date for the house. The sale is typically set for a date within the next 30 days as before the foreclosure sale is conducted, the sheriff must obtain three appraisals and publish an ad in a local newspaper for three weeks.
Some lenders will allow you to keep your original loan if you can make up the missing payments plus any late fees and legal charges. Others will insist you refinance with another lender. You can also halt the foreclosure, at least temporarily, by filing a lawsuit or filing for bankruptcy. For either legal option to work, you’ll have to be able to come up with a payment plan to fix the deficit.
If you fail to bring your payments current or to work out a payment plan with your lender the foreclosure sale will occur. The sale will be conducted as a public auction by the sheriff at the county courthouse. The sale price must be at least two thirds of the appraised value, and the property is sold to the highest bidder. After the sale, the court reviews and files an order confirming the sheriff’s sale. The sheriff then prepares and issues a deed transferring ownership to the winning bidder. As the homeowner, you have a right to redeem the property at any time before the sale is confirmed by paying the balance owed and court costs.
Your options
Lenders today typically offer a variety of solutions for people who have fallen behind on their mortgages. Among them:
- Temporarily reducing or waiving payments.
- Setting up short-term repayment plans to help you make up the deficit.
- Adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.
If you have certain types of loans, you may have even more options. If you financed your home with a FHA Loan, that is a mortgage insured by the Federal Housing Administration, you may qualify for an interest-free (and payment-free) loan to get your mortgage current. The money doesn’t need to be paid back until you pay off the mortgage or sell the house.
If you can work out a solution with the lender quickly enough, you can contain or even avoid serious damage to your credit. This why you are urged to call your lender as soon as you know you’ll have trouble making a payment.
This is good advice, but there are two reason why this can often be more difficult than it may seem:
Lenders can make it tough to get to the right people. The folks you want to talk to are in the “loss mitigation” department. But many lenders don’t routinely route borrowers to that department until they’ve missed several payments. Until then, you might be dealing with the lender’s collections department, which typically offers one option, “Pay up now”. If you’re serious about keeping your home, you may have to really push to get to right people.
You have to be able to make the payments. If you agree to a lender’s “workout” or “loan modification” solution and then fail to make the agreed-upon payments, your situation will get a whole lot worse. At best, you’ll have a lot fewer options the second time around, however, the outcome that is more likely is the lender will accelerate the foreclosure process.
This can be a big problem if the financial crisis that caused you to fall behind isn’t over and you don’t know where you’re going to get the money to make the payments. Trying to work out a solution with your lender will be tough.
If you’re honest with the lender and share this with them, they are not going to want to work with you and will seek to accelerate the foreclosure process.
That’s no reason to hide from your lender or ignore their letters, as even if you can’t work out an agreement, keeping in contact is usually the right choice as it keeps you informed as to where you stand.
Filing a lawsuit or bankruptcy carries similar risk: If you don’t have the money to make the payments, the foreclosure can proceed, and you may have further damaged your credit score.
Steps to getting out of this mess
So what to do? First, you’ll need to take a hard look at your financial situation. To that end:
Make a budget. Sketch out a spending plan for the next several months, including expected income and expenses. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In certain very limited circumstances — such as when you are absolutely sure your financial hardship will be short-lived — it may make sense to skip payments on some bills so you can pay your mortgage. Another option: borrowing money from friends or family, or tapping retirement funds. Do the latter only if you’re convinced you can make future payments; you don’t want to drain your retirement funds if it’s only going to result in the lose of your home sooner rather than later.
Consider getting help. Legitimate credit counseling services, those associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies, typically have housing counselors that can help you evaluate your options. Or you can find a housing counseling agency approved by the Housing and Urban Development Department by calling (800) 569-4287. If you have a Veterans Administration loan, you can call (800) 827-1000 to get a referral to a financial counselor.
Check your refinance options. If you have equity in your home, your credit rating is relatively intact and your lender hasn’t yet filed a notice of default, you may be able to get another loan with more affordable payments. Contact an experienced mortgage broker, to discuss your options. Be cautious about jumping into another risky loan, though: adjustable, interest-only or “option” mortgages might just put off the day of reckoning and you could find yourself facing even higher payments down the road.
Be realistic. Many times, people struggle to hang on to a house that they simply can’t afford and struggle only to delay the inevitable.
It’s far better to sell a home while you still have equity and some semblance of a credit score than to have it taken away through a foreclosure.
Be prepared to provide documentation. If you are going to try for a loan modification, you’ll need to prepare a small mound of documentation. The lender will specify what it wants, but typically you’ll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a “hardship letter” that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.
You may also want (or be required) to provide a market analysis of your house, to document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell.
Leaving home
If a loan modification or refinance isn’t possible or feasible, you’re left with four options:
Sell the house. If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You’ll preserve what’s left of your credit score and your equity, leaving you in a much better position to finance future purchases, such as a car or another home (in the future).
Negotiate a short sale. If you owe substantially more on your home than it’s worth, you may be able to convince the lender to agree to a short sale. In a short sale you essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit.
A short sale will still have a negative impact on your credit score, however, they are typically reported as a “settlement”, indicating you paid less than you owed. A skilled negotiator may be able to avoid this consequence, so talk to a Realtor who has experience with short sales.(the bank pays the commission on the sale of the home but you hire them and thus they represent you, and it’s you’re interest they serve)
Offer a deed in lieu of foreclosure. If you can’t sell the house for what you owe, but you’re not deeply upside down on your mortgage, you can propose a deed in lieu of foreclosure. This involves handing over the deed to your home in exchange for your lenders agreement to release you from your mortgage. This usually keeps you from having to pay any deficit that might be owed on the property, while the lender avoids further legal costs related to a foreclosure however, it does not guarantee that the lender will not pursue you for the deficit.
Lenders can not be forced to accept a deed in lieu. If a lender does decide to consider this option, they typically require that the borrower make a strong effort to short sell the home first, in addition to demonstrating that their delinquency was due to unavoidable hardship.
Allow the foreclosure to proceed. This is generally the worst choice! In some states including Ohio, the lender can even go after you in court for any deficit between what the house eventually sells for and what you owe including all of the costs associated with the foreclosure action as well as all late fees and the additional interest that accrued! An attorney or housing counselor can let you know if that’s a possibility.
Each of the options will affect our credit score to varying degrees, however, the damage to your financial life needn’t be permanent and you should immediately begin the process of working to rebuild your credit. For more details, check out “Bounce back fast after bankruptcy” for suggestions on how to rebuild your credit after financial disaster.
Contact us As local real estate short sale specialists we can help you make sense out of your options. If you are a homeowner who is having trouble making your mortgage payments and you are interested in exploring your options including the listing of your home as a short sale, please give us a call today at 614.332.6984. We’re here to help you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley Columbus Delaware Downtown Dublin Gahanna Grandview Heights Granville Grove City Groveport Hilliard Lewis Center New Albany Pickerington Polaris Powell Upper Arlington Westerville Worthington
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