Foreclosure. That word alone can send shivers down any homeowner’s back. Besides the embarrassment and disruption to the family, a foreclosure creates more problems than it fixes.
It affects your credit rating — and given the easy way information flows through the Internet, nearly everyone can know. Your credit score can affect many things, including what you pay for car insurance. It can create a problem in renting an apartment. It can even affect whether you get a new job or not.
Letting a lender take your home does not end the problem. Potentially you lose more than your down payment, closing costs, improvements and sweat equity. If you have other assets, those could be in jeopardy. Also, your Permanent Fund dividend could be garnished. You could also have a judgment against you for the balance owed, or owe taxes on any forgiven debt.
Even after you settle with the lender, you could be sued by the other lien holders. If you are unfortunate to have a second mortgage on the property, anticipate that the second lien holder will be more aggressive if it was not paid.
A foreclosure should be a last resort.
If you cannot make a full mortgage payment, don’t accept a foreclosure as inevitable; take action to prevent it. Staying out of foreclosure takes a little work, but it will be worth every bit of the effort to you and your family.
Here are two steps to help you keep your home:
• Assess your financial situation. Regardless of how you got into this position, if you can’t make a full payment, now is the time to act before you give up and start on the path to foreclosure. One solution is to seek help through a nonprofit debt-counseling center. Debt counseling will look at your situation objectively and contact your creditors to work out new terms or payment plans.
With debt counseling, you might even be in a better position to refinance out of adjustable-rate or interest-only loans. Your goal is to reduce your monthly debt.
• Contact your lender. Each lender has its own rules and procedures, and many will not help until you are late on your payment. However, late does not mean months. Late can be five days after your payment is due. Three or four months late might be too late to save your home. The earlier you ask for help, the more options lenders may offer. It costs a lender an estimated $20,000 or more to foreclose. It costs much less for a lender to work with you early on.
So be prepared. The lender will need your most recent pay stubs to show your net income. A computer program will analyze just how tight your financial situation is and what it will cost the lender to foreclose. The options also will depend on whether your financial situation is short term or long term.
You’ve already begun by taking the first step in seeking help with debt-counseling.
Here are five other options a lender may offer:
Option 1: A modified repayment plan.
This option works if skipping a couple of payment helps you thorough a short-term problem. Typically, the unpaid payments, including interest, are divided over 10 months. Your mortgage payment is slightly higher for that period, but your temporary setback might be over by then.
Option 2: Term modification.
Depending on how well you presented your financial situation, the lender might modify the terms of your loan. For example, the lender could re-amortize the number of years to repay the loan, adjust the interest rate or forgive part of the principal.
It is a win-win for both sides. The change in your mortgage payment might be enough to get you through your setback and allow you to keep your home. Your lender saves the cost of foreclosing. So don’t wait. If you are three or four months late in making mortgage payments, it could be too late to save your home.
Option 3: Claim on mortgage insurance.
Depending on the type of loan you have, and if you have been paying mortgage insurance premiums, your lender might file a claim on your behalf for the past-due mortgage and interest payments. This is another solution to a temporary financial setback.
Option 4: Short sale.
A short sale is selling your home for less than you owe and requires approval of your lender. It takes time to organize, so early lender involvement is essential. A short sale is not as damaging to your credit and could cost the lender less than foreclosing.
Depending on what other assets you have, you might be required to sign a promissory note to repay the shortfall. However, any debt forgiveness becomes taxable income and you must report it on your taxes.
Option 5: Deed in Lieu of Foreclosure.
If you qualify, a Deed in Lieu of Foreclosure is the final option before a foreclosure. This option is for hardship cases (divorce, job loss or death) that meet certain requirements.
There are potential tax consequences with debt forgiveness, but the lender does not seek a judgment for the unpaid balance, so it can be less damaging to your credit.
Finally, a word of caution. Your basic foreclosure information is readily available and can be used by scam artists to offer you false hope.
Here are three signs of a mortgage scam to avoid:
1. Avoid offers to buy your home and have you sign the property over, usually by a quick-claim deed, even if they allow you to rent back. While you might no longer own your home, only your lender can release you of the obligation to repay the mortgage.
2. Avoid any offer of help that requires you to pay money upfront. Your lender’s services are free. For credit counseling services, two sources to check are www.nfcc.org and click on “Take the First Step”; or at www.hud.gov and search for “credit counseling, Alaska.”
3. Avoid anyone who tells you not to make mortgage payments. Only your lender can change your mortgage payments.
Taking a pro-active approach early could help you keep your home. A foreclosure is not something your family should have to experience.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every fourth Friday. Their e-mail address is info (at) ramseyteam (dot) com.