The perfect storm of adjustable mortgages, declining home sales, and job loss have led to a rise in foreclosures. Short sales and foreclosures now represent 30% of all real estate sales in the country. But just because you're falling behind in your mortgage payments, you do have alternatives.
The consequences of foreclosure on homeowners are terrible -- loss of home and equity, damage to credit (lowers score 200 points or more and stays on report for seven years), and the less tangible emotional toll. Neighbors suffer as well, through lowered property values and vacant properties, which can attract vandals and squatters.
Even though the fear of foreclosure can be paralyzing, the worst thing that you can do is nothing. Thankfully, there are an increasing number of resources and new government efforts to support homeowners at risk (see resource list at bottom of post). Your first step should to contact a housing counselor, financial adviser and/or attorney. Explain your situation ask for advice on how to proceed. Depending on a number of factors, including your income and assets, the value of your house, and your loan terms, they may advise one of the following options:
- Refinance
- Lender workout
- Sell your home (bringing cash to closing if necessary)
- Short sale
- Deed in lieu of foreclosure
- Bankruptcy
Some homeowners have had success contacting their mortgage company's workout department, negotiating a change in the terms of their loan so that their payments are affordable. You may need to write what is known as a "hardship letter," describing the reasons you are no longer able to afford payments and suggesting a solution. Some common "hardships" include:
- Income loss or reduction
- Death of homeowner or spouse
- Forced relocation
- Medical bills
- Payment increase (i.e. adjustable rate)
- Business failure
- Incarceration
If a Work Out is not an option, your next consideration might be a short sale (discussed in
Part II of this series), where you and the lender agree to sell your home at a loss (to you and the lender). A short sale MAY only reduce your credit score by 50 points, although each loan and borrower is different and it could have the same credit impact as a foreclosure.
Remember that lenders want to avoid foreclosure almost as much as homeowners do because they lose $50,000 per foreclosure, on average.
Help is out there and it's free. Beware of foreclosure rescue scams that charge a fee to negotiate with lenders. Get started on your path to avoiding foreclosure with one of the resources here:
