With the economy still shaky in the United States, and jobs disappearing, mortgage foreclosures continue to rise. If you believe that you will soon be unable to pay your monthly mortgage payments, or if you have already defaulted and are in the process of foreclosure, you may have some options to avoid it if you want to keep the house.
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The first decision you need to make is whether you will be able to afford the house at all. If not, trying to sell the house prior to foreclosure can save your credit rating. However, the sale price must be enough to pay out the mortgage, otherwise you will have a deficiency and still owe the mortgage company. If you want to stay in the house, here are five options that may be available to you. They should be discussed with a credit counselor or lawyer prior to taking any course of action.
If you have an adjustable rate mortgage and have not defaulted on any payments to date, you may be able to simply refinance it. Rates are low right now and you may be able to reduce your overall monthly payment by both dropping the interest rate and by stretching the amortization of the loan back out to 30 years. In order to refinance, your credit score must be high and you cannot have defaulted on any other debt. (Both of these have advantages and disadvantages, depending on your financial needs and prospects. For more, see Mortgages: Fixed-Rate Versus Adjustable-Rate.)
If you are already behind on your payments, you may be able to qualify for a loan modification, where the terms of the loan are changed to reduce monthly payments. The federal loan modification program, under the Making Home Affordable program, was created for mortgages owned by Fannie Mae and Freddie Mac. All other mortgages must be negotiated between you and the lender. The lender is under no obligation to modify the loan, but may choose to do so if they are comfortable that it will prevent default and foreclosure.
This type of plan allows you to pay back all of the overdue payments and fees over time. You would pay back a portion of the overdue amount every month along with the current month's payment. This is often a good solution if your default was caused by a temporary situation, such as an illness or job loss. If the mortgage company believes that you will now be able to make your contractual payments, they may agree to the plan.
A forbearance often goes hand-in-hand with a repayment plan or a loan modification. A forbearance is an agreement between you and the lender that gives you a period of time to resolve your financial issues. It stops the collection activity, usually for a period of three to six months, at the end of which time, you enter into a repayment plan or, in some agreements, you must pay the entire amount overdue. Not all lenders agree to forbearance arrangements, but most will consider them if you can prove that your financial difficulties will soon be over. (For related reading, see Things To Know About The Home Modification Plan.)
It may seem that filing for bankruptcy protection to avoid or halt a foreclosure is an extreme move - and it is. However, if you have no other options and still want to live in the home, a Chapter 13 bankruptcy filing immediately freezes all creditor activity until a judge reviews the situation. The purpose of a Chapter 13 filing is to allow the debtor time to work out reasonable payment arrangements with their lenders. It is possible for the mortgage company to apply to the court to have the freeze lifted and allow the foreclosure to happen, but arrangement can often be worked out at this stage. A bankruptcy stays on your credit report three years longer than a foreclosure, but it may be your final option to save your house.
Avoiding Foreclosure Scams
There are many companies out there who take advantage of those who are trying to stay out of foreclosure. They "guarantee" loan modifications for a fee or tell you to stop paying your mortgage and to instead, pay them. It is illegal for any company (except a licensed lawyer) to charge an upfront fee to assist in a loan modification or other home rescue program. The best way to deal with default is with the mortgage company and a lawyer.
The Bottom Line
If you go into default on your mortgage payments, you may still be able to work with the lender to get you current and keep you in your home. Which one is best for you depends on how far in default you are and whether you will be able to catch up in the future. (For related reading, see The Pitfalls Of Buying A Foreclosure House.)