At the end of the day, what many people crave most is the coziness of their homes and the company of family. It may take years to build your dream home and fill it with your family's memories, but it only takes a few missed mortgage payments to take away your dream home. Foreclosure is every homeowner's living nightmare. In this article, we will go through the essential steps required to prevent foreclosure and also how to stay away from being victimized by foreclosure scams. (For related reading, see Are You Living Too Close To The Edge?)
SEE: Mortgage Basics
The Foreclosure Nightmare
The ugly threat of foreclosure lurks in the minds of many homeowners. Sometimes unanticipated financial troubles, like losing a job, high medical bills, divorce or a death in the family can affect a homeowner's ability to make his or her mortgage payments. Foreclosure occurs when you fall behind in your mortgage payments, thus authorizing your lender to repossess your property.
In some cases, the property is worth less than the total amount owed to the lender. This may complicate things, as it allows your lender to pursue a deficiency judgment, which represents the difference between the sold price of the property and the amount owed to the lender. If this happens, not only will you lose your home, but you will also be forced to fork out additional money to pay the lender. For instance, if your house is worth $200,000 at the time that a foreclosure occurs and you owe $220,000 to your lending company, a deficiency judgment of payment of $20,000 to your lender can totally knock you out.
Worst of all, foreclosures and deficiency judgments will usually have a negative influence on your credit score. A foreclosure stays put on your credit report for about seven to 10 years and will imply to other future lenders that you are a high risk borrower. This will make it more difficult for you to get a mortgage - or any other loan - in the future. (For more insight, read Consumer Credit Report: What's On It.)
The moment you receive foreclosure notice, the first thing to do is to contact your lender's Loss Mitigation Department and let them know about your monetary problems and situation. If necessary, take along your personal financial statements/documents and explain your insufficient income and rising living expenses.
Get in touch with your local government-approved housing counseling agency. It will provide free information about the list of organizations ready to bail you out when the bank is threatening to foreclose.
That said, some of the best ways to prevent foreclosure start before you even receive your initial notice. It is never too late to start keeping an eye on your extravagant monthly expenses and begin following a tighter budget. The extra savings from a less expensive lifestyle will allow you to create an emergency mortgage fund that you can tap into if you run into problems down the road. Having a minimum savings of six to eight months' earnings should give you a reasonable amount of slack until you can improve your financial situation. (To learn more, read Build Yourself An Emergency Fund.)
If the need arises, take the help of your local foreclosure service provider or loss mitigation consultant, provided you have made enough inquiries regarding the legitimacy of these organizations.
Beware of Foreclosure Scams
Unfortunately, there are a number fraudulent foreclosure-related companies ready to jump on you and prey on your unfortunate financial circumstances. The looming risk of foreclosure makes you susceptible to these foreclosure predators. These bogus companies may call themselves "foreclosure consultants" or "foreclosure specialists". Before opting for any of these companies, make sure you take a close look at their credentials and business reputations by checking them out at sources such as the U.S. Department of Housing and Urban Development.
How do these foreclosure scam-artists find you? It's rather simple. When your lender files your foreclosure notice with the public trustee, your community is alerted about it through the foreclosure listing in your local newspaper. Soon, phone calls, mail and people from these companies start hounding you.
There are many methods used by these fake companies to swindle homeowners. Let's go through the tricks that you need to be aware of in case of a foreclosure:
- Equity Skimming
In this scenario, a person who calls himself a buyer stops at your door and convinces you to sell your property to him (usually for less than market value) and promises to pay off your mortgage. The buyer is likely to advise you to transfer the deed of the property to him, move out of the house and stop interacting with your mortgage lender. The buyer will then rent out your property to a third party and start collecting monthly rental payments. Unfortunately, the buyer will make no effort to pay the mortgage payments, thereby allowing the lender to foreclose on your property. The skimming aspect comes into effect if you have a reasonable amount of equity in your property; the scammer will flip the property to pay off the debt and then make a profit by keeping the equity. Remember: signing a deed over to a third party does not relieve you from your mortgage obligations.
- Equity Stripping
In an equity-stripping scam, an unscrupulous mortgage lender will come to you with an offer to get you a loan; this person is usually aware of your poor financial condition. The lender pushes you to exaggerate your income on the application form to get the loan approved. You accept the loan because you need the money, even though you aren't entirely sure that you can afford the monthly payments. The moment you default on your mortgage payments, the lender will rush in to foreclose your property and strip you of your home's hard-earned equity.
- Phony Counseling Agencies
You may find a large number of phony counseling agencies that offer their services - for an outrageous fee. But all they do is make some inexpensive phone calls and complete paperwork. These agencies may negotiate a repayment plan with your lender or organize a pre-foreclosure house sale on your behalf. However, the jobs these companies perform can all be easily performed by the homeowner without the additional cost. The main aim of these agencies is to mislead and stop you from getting real help. So take care that you confirm that an agency is genuine before using its services and never undertake to pay up front for foreclosure services.
- Lender Scams
When you are on the brink of foreclosure, a lender may claim to rescue you from this situation by refinancing your loan with lower mortgage payments. In the beginning, the mortgage payments are considerably low as you are paying the interest only. At the end of the term, you suddenly realize that the total amount you borrowed is still due in a lump sum balloon payment. If you can't make the entire balloon payment or get your loan refinanced, you may lose your home to the lender.
- Phony Loan Transaction
In a phony loan transaction, a lender introduces you to a refinancing loan document that claims to bring your neglected loan current. However, the document may have the hidden motive of transferring the title of your home to the company's name for a very small part of its value. Many times the loan's terms will include prepayment penalties, balloon or interest-only payments, huge fees and immediate rate adjustments. Therefore, it is prudent to get all legal documents assessed by your attorney before signing them. (For related reading, check out Mortgages: Fixed-Rate Versus Adjustable Rate and ARMed And Dangerous.)
- Loan Flipping
In this type of scam, your lender may offer to refinance your loan and tempt you with some extra cash. If you fall for the trap and consent to get your loan refinanced, as soon as you make some payments, the lender will persuade you to refinance your loan again and offer you more cash for vacations or home renovations. You accept this attractive offer, take the cash and get your previous loan refinanced. In reality, this extra cash may be much less than the additional fees and costs your lender is charging for refinancing your loan. In this scam, your lender may not even make any attempt to explain to you that the increase in the loans imply added fees and points for refinancing, higher interest rates or even prepayment penalties on each time you take a loan. In short, repetitive refinancing could put you deep in debt and may ultimately lead to the foreclosure of your home. (To learn more, read Digging Out Of Personal Debt.)
- Internet and Phone Scams
Some con lenders convince you to apply for a low interest mortgage loan on the phone or internet. They then extract vital information about your social security and bank account numbers. In this scam, the loan is immediately accepted, after which you start faxing the documents and sending wire transfer payments to the phony company without even meeting the lender. Unfortunately, this scam will put you in twice as much trouble - your personal details have been stolen or sold and your home is still at risk of foreclosure. (To learn more about avoiding this scenario, see Identity Theft: How To Avoid It and Identity Theft: What To Do If It Happens.)
The Bottom Line
Foreclosure is a grave issue and, if not taken care of immediately, can leave you evicted from your home with a damaged credit score. The best way to save your home is to learn everything about foreclosure and track down appropriate mortgage help companies that will help you out of this jam. The instant you stop giving proper attention to this predicament, fake foreclosure companies will start exploiting you unfairly. Other than your family, your home is your biggest asset and, certainly, you are not going to let a few missed mortgage loan payments, some phony company or even your even mortgage lender to take it away from you without a fight.