March 30, 2007 — -- It has been all over the news -- foreclosures are on the rise. According to the Mortgage Bankers Association, more than 2.1 million Americans missed at least one mortgage payment in 2006. This year, experts predict an increase in mortgage foreclosures to the tune of 33 percent more than in 2006 (based on a report by RealtyTrac). While there is no silver bullet, there are some things you can do to avoid foreclosure and to save your home.
Foreclosure is the legal process by which your mortgage lender can repossess your home. Essentially, if you stop making mortgage payments, the bank can initiate a process to take back your home which usually involves the forced sale of the property at a public auction, with the proceeds of the sale being applied to the outstanding mortgage debt.
Typically, the entire process takes about one year to complete -- from the initial determination by the lender to the sale of your home.
When your house is foreclosed upon, you not only lose your home but you leave lasting scars on your credit report. In fact, a foreclosure can stay on your credit report for between seven to 10 years, making it very difficult, if not impossible, to buy a new home, shop for a car or borrow any money.
While your instinct may be to avoid opening the mail and letting your phone calls go to voice mail, the absolute last thing you want to do is put your head in the sand and ignore the warning signs. Instead, you should contact your lender as soon as you realize that you are not going to be able to make a payment, as most lenders prefer to help borrowers get back on track rather than having to go through the process of foreclosure. It typically costs a lender more than $40,000 to foreclose on a home, so for a lender, it, too, is their last resort.
There are different strategies available, depending on whether you are trying to save your home or merely rid yourself of the mortgage obligation without having to foreclose. If you think you can get back on track with your mortgage payments, you should consider:
1. Working with the lender to modify your loan. Based on your income and what you can realistically pay, the lender may work with you to change the terms of the mortgage -- such as extending the fixed period of an ARM or even lowering your interest rate -- to reduce the amount that you are paying each month.
2. Signing a formal repayment plan with your lender. If your financial troubles are the result of a serious illness or major hardship (that are not likely to be repeated), a lender may allow you to sign a repayment plan whereby you agree to bring your loan payments up to date within 18 months.
3. Asking your lender for a forbearance agreement. Basically, this is for the homeowner who had major damage to their home because of a natural disaster (Hurricane Katrina and its aftermath in New Orleans). The lender will reduce or suspend the payments for a specific period of time -- typically, no more than three months to allow you to catch-up and get your life back in order. The suspended payments are then tacked on to the back of the loan.
You have a few choices. First, if you have equity in your home, you can opt for a preforeclosure sale -- once the home is sold and the loan is paid off, the remaining equity goes to you. Alternatively, if you don't have enough home equity to take a profit after the sale, you can simply turn the deed of your home over to the lender -- this option is known as a "deed-in-lieu of foreclosure." Obviously, turning over your deed is not necessarily the most appealing option, but it does avoid the scars of foreclosure on your credit report and financial history.
You can also apply for a Federal Housing Authority insurance loan if your home is backed by an FHA-insured loan. In this scenario, the government will pay off your debt and let you start fresh with your mortgage. The money is not free, though -- after you sell your home or pay off your first mortgage, you owe the government the money they loaned you to wipe out the foreclosure notice.
Yes. Similar to a company filing for Chapter 11, you can file for Chapter 13, which allows you to pay off your debt over the next 60 months. Keep in mind, by taking this step, you may save your home, but it is also a major drag on your credit report. In fact, it has a major domino effect on your credit worthiness -- resulting in an increase in the interest rate on any loan you are able to secure -- including that of a credit card.
Unfortunately, if the solution to your financial woes sounds too good to be true, it usually is. First, avoid any person or agency that offers to perform services for you for a fee that you could easily do for yourself, such as negotiating a revised payment plan with your lender. Also, be wary of people who position themselves as "buyers" who can help you escape your financial trouble by offering to assist in selling your home and paying off your mortgage, if you first move out of the property and sign over the deed to the house to them.
In this type of scam, known as equity skimming, the so-called buyer would then rent out your house, collect monthly rental fees, but not pay the mortgage, thereby letting your home slip into foreclosure -- and at the end of the day, you may still be responsible for any outstanding fess after the home is sold at auction.
Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.