Foreclosure: Help for Homeowners Facing the Loss of Their Home

For most families, a home is not only a significant financial investment but also a source of pride. A loss of a job, medical expenses and other life-altering occurrences can happen to anyone, causing us to fall behind in our loan payments. If we neglect paying our credit cards it hurts our credit rating. If we stop paying our home loan, however, the situation is even worse—the lender can foreclose, taking ownership of the home.

If your family is facing any of these changes and cannot pay your bills, now is the time to look closely at what you owe and what you earn. Eliminate unnecessary spending and reach out for help if you still can't meet your financial obligations. Taking action now can help you protect your family from the loss of your home.


Steps To Take When You May Be Unable To Pay Your Mortgage

First, contact your lender as soon as possible. Many people avoid calling their lenders when they have money troubles. However, lenders want to help borrowers keep their homes. Foreclosure is expensive for lenders, mortgage insurers and investors. Besides, HUD/FHA, private mortgage insurance companies and investors like Freddie Mac and Fannie Mae require lenders to work aggressively with borrowers who are facing money problems.

Your lender may have workout options to help you keep your home. Remember, these options work best when your loan is only one or two payments behind. The farther behind you are on your payments, the fewer options you have available.

Don't lose valuable time by being overly optimistic. Contact your mortgage lender to discuss your circumstances as soon as you realize that you are unable to make your payments. While there is no guarantee that any particular relief will be given, most lenders are willing to explore every possible option.



Information To Have Ready When You Call Your Lender:


To help you, lenders typically need:

• Your loan account number
• A brief explanation of your circumstances
• Recent income documents (such as Pay stubs; Benefit Statements from Social Security, Disability, Unemployment, Retirement, or Public Assistance. If you are Self-employed, have your tax returns or a Year-to-date Profit and Loss Statement available for reference)
• List of household expenses

Expect to have more than one phone conversation with your lender. Typically, your lender will mail you a "loan workout" package. This package contains information, forms and instructions. If you want to be considered for assistance, you must complete the forms and return them to your lender quickly.


Prioritize Your Debts

If you are under money strains, getting by will require a new, tightened budget. Nows a good time to prioritize your bills and pay those most necessary for your family: food, utilities and shelter.

Failing to pay any of your debts can seriously affect your credit rating. However, if you stop making your mortgage payments you could lose your house. Whenever possible, any income available after paying for food and utilities should be used to pay your monthly mortgage payments. Take any responsible action that will save cash.

In addition to speaking with your lender, you may want to contact a nonprofit consumer credit counseling agency that specializes in providing help in restructuring credit payments. Free of charge or for a small monthly fee, credit counselors can often reduce your monthly bills by negotiating reduced payments or long-term payment plans with your creditors.


Preserve Your Good Credit

Do not underestimate the importance of preserving your good credit. Your future ability to purchase certain items, rent or buy a home, and complete other transactions often requires a credit check. Consumer credit agencies and your lender can help you explore solutions to keep your credit from getting blemished.


If Your Problem Is Temporary - Call Your Lender

If you are simply behind a payment or two, here are some options you lender may suggest:

Reinstatement
Your lender is always willing to discuss accepting the total amount owed to them in a lump sum by a specific date. They will often combine this option with a Forbearance.

Forbearance
Your lender may allow you to reduce or suspend payments for a short period of time after which another option must be agreed upon to bring your loan current. A forbearance option is often combined with a Reinstatement when you know you will have enough money to bring the account current at a specific time in the future. The money might come from a hiring bonus, investment, insurance settlement, or a tax refund.

Repayment Plan
You may be able to get an agreement to resume making your regular monthly payments, in addition to a portion of the past due payments each month until you are caught up.

If it appears that your situation is long-term or will permanently affect your ability to bring your account current, your lender may suggest:

Mortgage Modification
If you can make the payments on your loan, but you do not have enough money to bring your account current or you cannot afford the total amount of your current payment, your lender may be able to change one or more terms of your original loan to make the payments more affordable. Your loan could be permanently changed in one or more of the following ways:
o Adding the missed payments to the existing loan balance.
o Changing the interest rate, including making an adjustable rate into a fixed rate.
o Extending the number of years you have to repay.

Claim Advance
If your mortgage is insured, you may qualify for an interest-free loan from your mortgage guarantor to bring your account current. The repayment of this loan may be delayed for several years.


If Keeping Your Home Is Not An Option—Call a Real Estate Agent

If catching up is not a possibility, the lender might agree to put foreclosure on hold to give you some time to attempt to sell your home. If this is the case, contact a real estate agent immediately. There are steps real estate agents can take to help you avoid foreclosure and save your equity and save your credit. With your home priced right, they can sell it quickly and save your credit and equity that you’ve taken many years to build.


If the property's sales value is not enough to pay the loan in full, your lender may be able to accept less than the full amount owed—this is called “Pre-foreclosure” or “short pay-off”. This option can also include a period of time to allow your real estate agent to market the property and find a qualified buyer. Monetary help may also be available to pay other lien holders and/or help toward paying a few moving costs.

A third option is called “Assumption”. A qualified buyer may be allowed to assume your mortgage, even if your original loan documents state that it is non-assumable.

Finally, your lender may agree to allow you to voluntarily "give back" your property and forgive the debt. This is called “deed-in-lieu.” Although this option sounds like the easiest way out for you, generally, you must attempt to sell the home for its fair market value for at least 90 days before the lender will consider this option. Also, this option may not be available if you have other liens such as judgments of other creditors, second mortgages, and IRS or State Tax liens.


Beware Of Predatory Lending Schemes and Low Offers from Investors

Most mortgage lenders are reputable and provide a valuable service by allowing families to own a home without saving the thousands or hundreds of thousands of dollars necessary to buy it outright. However, a few, unscrupulous lenders—especially those who make high risk second mortgages—engage in predatory lending practices. These abusive practices include making a mortgage loan to an individual who does not have the income to repay it, charging excessive interest, points and fees or repeatedly refinancing a loan without providing any real value to the borrower.

Homeowners frequently receive refinance offers in the mail telling them that they have been "pre-approved" for credit based on the equity in their home. When you are wondering how you are going to pay your mortgage and other bills, it may appear very attractive to borrow against your house. But consider this, if you cannot make your current payments, increasing your debt, even if you get some temporary cash, will make it harder to keep your home.

Also, beware of scams like equity skimming where a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out. Also, beware of phony counseling agencies who offer counseling for a fee when it is often given at no charge.

Finally, beware of investors who might throw lowball offers at you. They might save your credit by buying the home off of you, helping you to avoid foreclosure, but you’ll probably lose quite a bit—if not all—of your equity. A marketing plan designed by a professional real estate agent can sell your home quickly where you can avoid foreclosure and save your credit and equity.

Avoiding Foreclosure: FAQ

1. I owe more than my home is worth and I can’t make the payment. How do I know if I qualify for a short sale?

If you can’t make your payment and your total debts are greater than your assets you may qualify for a short sale. However if you have other assets to cover the mortgage, you might not fit their requirements. Your mortgage lender will make a final decision after receiving our Short Sale package.

2. How did so many homeowners get into this situation?

There are many reasons that seller right now may have no equity in their homes. (Equity is what you have left after you pay off all mortgages and other selling expenses.)

• Many people have lost their hobs in our current economic crises.
• Some Buyers obtained 100% financing, and the market declined.
• Others have adjustable mortgages set initially for a "teaser" rate. They were not prepared for the higher payment after an adjustment took place.
• Others may have made risky decisions and simply bought too much house.
• Some borrowers may have gotten poor advice from family and friends, as well as industry "professionals".
• Others might have been victims of Mortgage Fraud.
  

3. I can’t make my house payments but I may have an ability to pay back all or part of the difference. Is a short sale right for me?

Start by talking to your lender. In cases where you can pay back all or part of the shortfall after the sale it makes sense for them to work out a repayment plan. If you qualify, the lender will then release the lien and allow the home to close.

4. Will a short sale affect my credit score?

Yes, since it shows that you were unable to pay a mortgage according to the agreement you signed. It might take around 3 years to re-establish good credit. It will generally have far less negative effect on your credit than a foreclosure or a bankruptcy, which are last-resort measures if you cannot do a short sale.

5. If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?

The mortgage insurance protects the lender, not you the borrower.

6. Do I have to have my short sale approved by the lender prior to offering it for sale as a short sale? I called them and they wouldn’t talk to me about it.

The approval process does not begin until after there is an offer. There are steps that I can help you take right now to speed up the process. I know how to approach the lender and what they need to make it happen.

7. I just missed a payment and I know I will miss more. Is there time to do a short sale so that I can avoid foreclosure?

The foreclosure process can take up to a year. Generally speaking, a well priced short sale h by an educated short sale listing agent will sell and close in around 4 months provided the seller and lender cooperate.

8. Will I still have to pay property taxes if I do a short sale?

Property taxes will always have to be paid as part of any accepted short sale. Whether it’s you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.

9. My home needs repairs and upgrading. Am I expected to take care of these items out-of-pocket before selling?

Short Sales are “As-Is” sales. In exchange for a low price, buyers will be asked to perform their own repairs after the purchase, and may also be expected to cover the cost of termite inspections, surveys, and association documents to name a few, which would otherwise be paid for by the seller. Bottom line: don’t spend your scarce funds, but any clean up and organization you can do to make your property look better will help get the home sold quickly and at a price the lender is more likely to accept.

10. Do I have to pay income taxes as a result of the short sale? I have heard that I will get a 1099 form from the mortgage company and might be treated as a taxable gain to me, the seller. Is this true?

This was once true. Very recently the tax law was modified and this may no longer be the case for some people. Always consult your Tax Attorney, CPA, or EA.

11. How do you, my listing agent get paid - who pays the real estate commission?

When a short sale is approved, your mortgage lender will add the real estate commissions along with all the other usual closing costs to the amount they will have to pay in order to allow the sale to close.

12. Do I have to miss a payment to do a Short Sale?

No. Late in2008 most major lenders started accepting short sale offers from sellers who have never missed a payment if they see a future hardship.

13. I want to do a short sale and have a 2nd mortgage, does this make me ineligible?

No. Both of your lenders will need to be satisfied in some way to complete the short sale. After your first lender is paid off or settled by the sale, then payment terms with the second lender must be handled. Many short sales do involve 1^st and 2^nd mortgage holders.

14. As a buyer, are short sales a good way for me to get a below market price for a home?

Short sales offer good values for buyers who are willing to wait! Make sure your expectations are realistic. It is nearly impossible to close in the usual 30 – 60 days so. Also, remember that your purchase must be approved by the lender, and they will not agree to performing repairs or paying for some of the closing costs that sellers pay in a typical home sale. Make sure you are using an experienced Buyers Agent who understands the short sale process.

15. Why are Adrienne Lally and RE/MAX Honolulu the best choice to help me?

If there is a way for you to keep your home, and you want to, I always recommend exploring that first. But if you really need to sell, I will work tirelessly to help you through these difficult times. As a full-time Hawaii Realtor since 1986, I have helped many homeowners make tough decisions. Your goal will be my focus, and I take a personal interest in giving you the best available information. When you need outside help, I will refer you to others such as tax and legal professionals, so that you know you are doing the right thing.

This information is not a substitute for legal advice, and some of this information may not apply to you. Always obtain the opinion of a qualified attorney, tax professional, and financial planner before taking any action relating to a short sale or foreclosure. These opinions are based on reliable information but are not guaranteed.