Just last week, I received a phone call from a close friend who is about to lose her home due to foreclosure. She and her husband have been under financial pressure for some time now, and the combination of children in college, rising gas prices, and minimum payments on her credit cards have brought their finances to the breaking point.
“What can I do?” she asked, with panic in her voice.
Like many people who face foreclosure, she saw it coming, but didn’t act quickly enough. She hoped thing would work out, as most of us do when times get tough.
If you are worried about being able to keep up on your house payments, you must act quickly. The longer you wait, the greater the chances are that you could lose your home, and the more expensive your options become.
Also, keep in mind that if you do allow your home to go into foreclosure, the lender may be able to get a “deficiency” judgment for the difference between what you owed (including attorney fees and other costs) and what your home sold for at auction. (Not all states allow lenders to collect deficiencies.) So, doing what you can now to save or sell your home may also save you from many headaches down the road.
What to do When Foreclosure is on the Horizon
Get Real: The place to start is with a very clear picture of your income and expenses. While it may be the last thing you want to do right now, creating a budget is essential.
You are likely to need this information if you try to work out a payment arrangement with your lender or file for bankruptcy protection.
If you do a thorough job writing down your income and expenses, you will know whether the difference between the two is just a tiny leak or a gaping hole. You will get a better idea of whether you can afford to save your home, and you will be able to quickly evaluate any offers by your lender to get you back on track.
Make a list of your debts, the interest rates you are paying, and minimum payments. Also make a list of your regular monthly expenses and a reasonable estimate for variable expenses like groceries and gasoline. Finally, be sure to highlight any debts that you owe. For example, if you are behind on your credit cards, utilities, or other bills, make a note of what it will take to catch up.
Scrape Something Together: Your home loan is what the experts call a “priority debt.” Do whatever you can to find the money to pay your mortgage each month. Once you start falling behind on your mortgage, it is a very steep and slippery slope into bankruptcy or foreclosure.
You may have to consider taking a second job, start selling household items on ebay, taking in a renter, or finding other ways to boost your income. You may also have to let other bills slide if it means saving your home. Enrolling in a credit counseling program may provide you with the relief you need on your credit card debts, so that you can focus on making sure the mortgage gets paid.
Refinance: If your credit hasn’t been negatively impacted yet, you still have equity, and you can get a loan at a decent rate, you may want to refinance or take out a home equity loan to help you ride out the storm. Tread carefully, however. If your problems last longer than you expected, you may find yourself still in a jam but with no equity left in your home. Be especially careful about paying off credit card debt with home equity. If you aren’t able to recover as quickly as you hoped, you could be forced to pay back debts that would have been wiped out in bankruptcy.
Ask for A Break: Lenders do not want to take your home away from you. It is expensive and time-consuming. Lenders have employees whose job it is to try to help you work something out to save your home. That may include allowing you to make lower payments for a period of time, or tacking missed payments on to the end of the loan. To decide whether you truly qualify, the lender will require you to fill out paperwork demonstrating the hardship and your ability to get back on your feet. That is where the budget you created will come in handy. Be certain to get any agreements about payment arrangements in writing, and keep a file with copies of correspondence with the lender.
Get Help: If you cannot work things out with your lender, either because your lender is uncooperative or you feel overwhelmed, you may want to get help. The Department of Housing and Urban Development maintains a list of HUD-approved counseling agencies that may be able to help you avoid foreclosure. If you have an FHA or VA loan, you should definitely contact one of these agencies for help since these types of loans come with some good programs designed to help keep you keep your home.
There are also private agencies such as HomeSavers USA that can assist you in working out arrangements with your lender. An attorney who specializes in bankruptcy will likely be familiar with foreclosure laws in your state, and may also be able to help with issues such as predatory lending, violations of consumer protection laws, or other legal problems.
File for Bankruptcy: A bankruptcy attorney can help you decide whether it makes sense to file in order to keep your home. You will still have to make your mortgage payments if you go through bankruptcy, but you will have the protection of the court while you catch up, according to John Ventura, a consumer law attorney and author of Stop Debt Collectors Cold.
Know When to Fold: Sometimes, holding on to your home may be impossible. You need to be able to recognize when it is time to let go, before you lose your house and the equity you may have. If you decide to sell, you must be realistic about the sales price you require and the time involved to sell it. You will not be able to get top dollar if you need a quick sale or you cannot make necessary repairs.
Do not accept a sales contract from anyone who is not pre-approved in writing from a lender – you do not have time to waste on an unqualified buyer. And if you sell without the help of a real estate professional, hire a real estate attorney to review the contract and help you with the paperwork.
If you have little or no equity in your home, you may have to work with a real estate investor who can “short sale” your home, which means the investor gets the lender to agree to accept less than what you owe on a sale. While this has its own risks (if it turns out you are not dealing with someone experienced or reputable), there are times where this strategy can allow you to sell your home and move on with your life. If you go with this route, get an agreement in writing from the lender that you will not be held responsible for the “deficiency” – the difference between what you owed and what was paid. Also keep in mind that the lender may report any forgiven balance as “income” to the IRS, and you may have to fill out paperwork showing the IRS you are insolvent in order to avoid paying taxes on that phantom income.