If you know you must miss a mortgage payment, the worst thing you can do is to
hope that no one will notice, or that if you don't answer the phone your
lender will assume you are just a very busy person and wait patiently for you
to catch up. Ostriches don't solve problems and, in the present context,
don't usually manage to duck foreclosure.
One missed payment greases the slipperiest of slopes and by the time you miss
payment two, you will be sliding down that slope pretty fast.
Therefore, once you have even an inkling that you might have to skip
a mortgage payment
, contact your lender or the company servicing your
mortgage. Ask for customer service and explain, politely, calmly, and in the
most concise manner possible your current financial situation. A wild desire
for a new SUV or plans for a $50,000 wedding are not going to cut it, but a
real emergency will probably earn a hearing.
You might be told that, since you have not missed a payment, there is nothing
that anyone can do so ask that your call be recorded and obtain the representative's
identifying information or a case number. Hang on to this information to prove
that you did try to get ahead of the situation. Once you actually miss the payment,
As we stated in the earlier article,
there can be a hundred different ways your problem is handled. This is to some
extent dictated by state law but is mostly driven by the philosophy and policies
of your lender and the company with the rights to service your loan.
Fannie Mae, Freddie Mac, FHA, the VA and many private investors have finally
realized that it costs a lot of money to foreclose on a house and that, at the
end of the day they don't really want to be property managers. Thus they
are increasingly willing to provide borrowers with assistance to help
stop foreclosures when possible and to affect a smooth transfer of
the property when they are not. Furthermore, they are training those who service
for them and are even penalizing servicers who do not work energetically to
mitigate forclosure losses. But there are lenders and servicers
who still operate in an aggressive collectors' mode; bullying the borrower,
refusing to consider a workout or compromise. Some even defy fair collection
rules and harass delinquent borrowers.
But you have to do the best you can with what you have to work with.
Borrow from Peter
A temporary mortgage shortfall because of an unexpected emergency is quite
different from an ongoing problem resulting from a job loss or overwhelming
debt. If the problem is short term, maybe there are adjustments you can make;
can you slip other payments - utilities, student loans, credit cards?
None of your creditors are going to take a missed payment well, but some will
be easier to deal with than others. Contact them all and find out what accommodations
they might make. Will these adjustments allow you to squeak out the mortgage
payment? A great solution as long as you can catch up with everybody else in
a month or two.
Some financial experts advise always having a home equity line in place
for just such emergencies. This presumes, of course, that you have the equity
and credit to qualify for such a line, but it can certainly be a lifeline in
sudden emergencies. Once you are in trouble, however, it is probably too late
to invoke this solution.
Mortgage lenders are often willing to make substantial concessions to stop
home foreclosure and keep you in your home.
A workout might be as simple as allowing you a few months of forbearance during
which partial payments will be accepted or you can skip paying altogether. This
might be followed by a temporary arrangement in which you make the regular payment
plus an amount to catch up the past due amount over a period of time. If you
are substantially delinquent or the ability to catch up seems far away, a workout
could involve converting the past due amount to principal and re-amortizing
the loan, possibly at a lower interest rate. Maybe just a temporary or permanent
interest rate reduction would be enough to pull things back together.
Loan workouts usually require a lot of work on the borrower's
part - there will be financial statements to complete, maybe copies of
recent tax returns, letters justifying the financial emergency, copies of bank
statements, etc and the lender will want an appraisal although they will often
make due with a drive-by or "windshield" appraisal. Many
lenders work through this documentation with maddening slowness and may be unwilling
to help stop foreclosure that is grinding along independent of the
restructuring. Thus a borrower can find himself in a race between workout and
foreclosure while his debt continues to mount.
It is important to note that many lenders/servicers will assess a fee for restructuring
a loan and that a second mortgage or any tax, mechanics, or homeowners'
association liens may hopelessly complicate the process.
There is no point going through a workout if it is obvious that you will be
unable to keep up the new payments any better than the old. There may be a point
at which you must be absolutely honest about whether or not you can afford to
stay in the house.
If the answer is no, there are still alternatives. Ask your lender to provide
enough forbearance to allow you to sell the house, hopefully for enough to pay
off the mortgage and any accumulated fees and give you enough left over to get
on your feet. If it is doubtful that the sale will cover the mortgage and selling
expenses, explore a "mortgage
short sale" (see "Mortgage Short Sale - An Exit Strategy
or an Investment Opportunity, July 5, 2005). Another option is a deed
in lieu of foreclosure in which you surrender ownership without going
through the foreclosure process. Again if there is a second mortgage or other
liens this alternative probably will not work. Foreclosure of a 1st lien wipes
out all subsequent liens (except for taxes and some specialized exceptions)
but a deed in lieu does not. Thus the lender will be left owning a property
subject to other encumbrances, a prospect he probably will not even consider.
Another important thing to remember is that a foreclosure or a deed-in-lieu
does not necessarily wipe out your debt. If the sale of the property does not
satisfy the debt (and remember all of those late and legal fees that have been
piled on) the lender can seek a judgment for the deficiency. The lender can
seek to satisfy this judgment from any asset you own, although retirement accounts
are usually immune and judgments can last for as many as 20 years.
The last alternative is filing for bankruptcy to stop foreclosure.
Bankruptcy will stop a foreclosure dead in its tracks, for a while, but doesn't
guarantee you can keep your house and has far-reaching and long-lasting ramifications.
Consult with an attorney before you even think seriously about this possibility.
Again, the very best thing you can do if you are ever confronted with this
painful situation is to face it squarely, be upfront with your lender,
and brutally honest with yourself.