Steps to Avoid Foreclosure: What to Do When You Can’t Keep Up With Mortgage Payments

According to this news article 20 percent of the sub-prime loans issued over the past two years will wind up in foreclosure, perhaps driving more than two million families from their homes! If you are one of the unfortunate people snagged into a sub-prime loan or know of someone who is, and finding it hard to keep up with the mortgage payments, it is important to remember that a foreclosure can be avoided. You need to be aware of your options and take action to prevent your home from becoming a part of the above statistic. Here some steps to take to avoid foreclosure.

Avoid being in denial
If you are starting to feel the heat and finding it difficult to keep up with the mortgage payments, being in denial is one of the worst things you can do. Do not miss any payments. If you already have, do not ignore letters from the lender. The sooner you speak with the lender, the better are your chances of avoiding foreclosure. When it comes to foreclosure, the lender is on your side. They need your interest payments – your house is a big white elephant they don’t particularly care to own. So, first take stock of your financial situation and determine how much you can continue to pay. Next call your lender.

Ask your lender to reduce your interest
Here is a discussion on fatwallet finance forum that has a lot of information on whether it is possible (short answer, yes) and how to approach the lender to reduce the mortgage interest. In summary, a lender can reduce your interest rate without requiring you to refinance, through a process called Loan Modification (also called, streamline modification). Loan Modification allows the lender to reduce the interest rate while keeping the terms similar to your existing loan. However, it is up to the lender whether the start date of your loan remains the same as before or is reset (in which case, your payoff date will extend). Note that this is *not* the same as refinancing your mortgage and so you will not be required to pay any closing costs. (Check this article for difference between loan modification and loan refinancing). Not all lenders offer loan modification since the banks sell off their loans to mortgage pools or mortgage backed securities. But there is no harm trying and this should be one of the first things to do. Make sure you speak to someone in the “Loss Mitigation” department.

Ask the lender for “repayment plans”
If you are in good standing with regards to your payments so far and you have a good credit history, the lender may agree for differed payment. In this case, you are allowed to skip a couple of payments, but will have to pay multiple installments later. If you plan to add another stream of income (eg., take up second job, spouse can start working etc.,) this may buy you some time.

Try to sell your house
If you are not very much upside-down on the loan, you might want to try and sell your house before it gets uglier. It is a very difficult decision, but it is better to sell you house than let it go into foreclosure. Remember, foreclosure not only wreaks emotional disaster on you and your family, it will wreck your credit rating too.

If you are upside-down and cannot sell your house, but have a buyer interested in a lower sale price, speak to your lender about “short sale”
Lenders do not like foreclosures because the cost of putting the house for sale and recovering the costs is huge, and it is not their main line of business. So, if you can bring in a buyer who is willing to buy the house for a little lower than the debt amount, the lender may be willing to cut the losses by accepting the trade and writing off the difference. So, if you have a buyer, definitely approach your lender.

Look for foreclosure hotlines or other non-profit organization that can negotiate on your behalf
It may be possible for a third party to negotiate with the bank on your behalf. In such a case it may be possible to have the lender write-off a part of your loan, and refinance you for the remaining amount.

Once again, the earlier you realize that you are in trouble and look for ways to resolve the situation, the better are your chances of avoiding a messy foreclosure.

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Comments

  1. Chapter 7 Bankruptcy says:

    Hey thanks to share this with us.it will give me knowledge about mortage payments.i like the exaplanation.great exaplain.

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