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Mortgage delinquencies and foreclosures are at an all-time high. It’s shocking to review statistics about millions of people who’ve fallen behind on their mortgage payments. It’s alarming to read stories about people you don’t know struggling to keep their homes. It takes on an entirely different perspective when you meet face-to-face with real people who are on the brink of foreclosure.
In recent months, I’ve worked with hundreds of people who are depressed and scared out of their mind because they’ve fallen behind on their mortgage and cannot catch up. These are real people, some of whom you see and mingle with everyday.
If you don’t pay your mortgage payment over a period of time, a mortgage company has the legal right to take possession of your home. A foreclosure is a major negative on your credit report. It can have an adverse effect on you when buying insurance, applying for a job or obtaining financing in the future. With a foreclosure, there’s a good chance that the lender will sell the property for less than what is owed on it. Should this happen, they’ll pursue you for the deficiency balance plus various fees. There’s nothing worse than paying for something you no longer own. Foreclosure is a gut-wrenching, humbling experience that you want to avoid like the plague.
Below are some tips to help you prevent and avoid foreclosure:
Get your financial house in order first then seek homeownership. As Benjamin Franklin said, “An ounce of prevention is worth a pound of cure.” Before you move into a home, you should have your spending under control, little to no consumer debt, savings set aside for emergencies and a reasonable down payment.
Never take on a mortgage where the payment exceeds 35 percent of your take home pay. Contrary to popular belief, homeownership is NOT “The American Dream.” It’s a component of “The American Dream.” You still want to eat, keep the lights on, send the children to college, save for retirement and have a life. When you take on a mortgage payment that exceeds 35 percent of your take home pay, you hinder your ability to have a fulfilling life and you’re more prone to falling behind on your mortgage payments
Never take on an adjustable rate mortgage. Never subject the roof over your head to potential payments increases. When adjustable rate mortgages adjust, your monthly payments can soar to $200, $500, or even $700 more than what you’re currently paying each month, sending you into what industry experts call “payment shock.”
Be proactive. If there’s a remote possibility that you’re about to fall behind on your mortgage, seek help. You have a better chance of saving your home when you’re one or two months behind than you do your when you’re six or seven months behind. Contact the lender and explain your situation. You’ll be surprised to know that many companies would rather work with you then foreclose on your property. Contact a fee-only financial planner who can help you fully understand the options that are available to you.
Forbearance agreement. If you’re experiencing an isolated incident that’s hindering your ability to make timely payments, a lender may extend mercy to you by allowing you to temporarily make partial payments or pay nothing at all for a set period of time.
Reinstatement. If you have access to a lump sum of money such as a tax refund, savings, bonus, etc., you can pay the mortgage company the total amount you are behind. This will allow you to become current on your mortgage, giving you a clean slate.
Refinance. If you have an adjustable rate mortgage and your payment has risen higher than what you can reasonably afford, you may be able to refinance your adjustable rate mortgage into an affordable fix rate mortgage.
Repayment plan. Perhaps you fell behind on your mortgage payments because of a temporary setback but now you’re back on your feet. A lender may be willing to offer you a repayment plan. A repayment plan is when a lender allows you to make your regular mortgage payment plus an additional amount allowing you to gradually get current with your mortgage.
Loan modification. A lender may be willing to temporarily or permanently change the interest rate and/or terms of your mortgage note to make the payments more affordable.
Chapter 13 Bankruptcy. A Chapter 13 Bankruptcy is a court-approved repayment plan that will stop foreclosure and allow you to gradually get current on your mortgage. The problem with Chapter 13 bankruptcies is that nearly 80 percent of them are either dismissed or converted to a Chapter 7 Bankruptcy because of the debtor’s inability to honor the repayment plan.
Sell. The aforementioned suggestions assume that you can realistically afford the home. You just need a practical solution to get current on your payments. In the event you’re in a house you can no longer afford, the best thing to do is sell the property and downsize into a more affordable housing situation.
Short-sale. If you’re having a hard time selling the house because the offers you’re receiving are lowering than what you owe on the mortgage, a mortgage lender may be willing to accept a short-sale. With a short-sale a lender will accept the offer and write off the unpaid balance.
Deed-in-lieu of foreclosure. If you’ve done everything within your power to prevent foreclosure to no avail, the last option would be a deed-in-lieu of foreclosure. This is essentially a friendly foreclosure where the lender avoids the lengthy, expensive process of foreclosure and cancels the debt you owe on the property.
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. He can be reached at 412-856-1183.)
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