The road to foreclosure moves quickly–if you default on a single mortgage payment, you could find yourself on the street with alarming speed. In some states, like Texas, it can take as few as 27 days.
The good news is that, with home prices falling and industry standards changing, banks and lenders are better off keeping you in your home than kicking you to the curb.
Should you find yourself unable to pay the bills, there are a few things you can do to help ensure you keep your home and hold off foreclosure.
Start the road to recovery by being honest about your financial situation. “The most important thing is to understand what went wrong and come up with a sustainable solution,” says David Friedman, a lawyer at the Financial Clinic, a non-profit that provides legal and financial counseling to low-income families.
Review your original loan documents and examine your income and budget. Go through your expenses with a fine-tooth comb. Consider your monthly spending and come up with a realistic assessment of your financial situation.
If you need help assessing your finances, Friedman suggests contacting a housing counselor. But be wary of fly-by-night scam artists who charge hundreds or thousands of dollars in exchange for a “guarantee” they can stop the foreclosure process. Make sure your counselor has been vetted by the U.S. Department of Housing and Urban Development –a list of approved counselors can be found on its Web site .
The sooner you contact your lender or the company that collects your monthly payment, the better. The first thing it will do is assess whether there are extenuating issues that explain your financial difficulties.
If your problems are temporary–maybe you’ve recently incurred big medical bills or been laid off–your lender is more likely to work with you on a short-term solution. It may give you a deadline to make up missed payments in one lump sum, or might offer to freeze your monthly statements until you can resume payments as usual.
The most likely short-term scenario
is that your lender will offer to work out a repayment plan–one that includes your regular monthly payments plus a fraction of what you’ve missed, until you’re all caught up.
Depending on your circumstances, your lender may even be willing to modify the terms of your loan entirely. The bank can extend the amortization period–the time you have to repay your loan–lower your interest rate or change it from an adjustable rate to fixed.
Whatever plan you and your lender agree to, make sure it’s sustainable. Too often, homeowners make loan modifications that actually exacerbate the problem. A forthcoming study in the Connecticut Law Review estimates that only 49% of loan modifications result in a reduced monthly payment, while 34% actually increased the borrower’s payments. In these cases, the lenders weren’t working to reduce their borrowers’ burden, but to recapitalize on it. The result? More than half of borrowers re-defaulted within nine months of receiving their modifications.
If you can’t find a way that you’ll be able to afford your mortgage, it could be time to face a tough fact: Selling your home may be the best solution. If this is the case, your lender will set a deadline for you to find a buyer and pay off your mortgage balance. If you can’t sell the property for the amount you owe, it might be willing to accept a smaller sum. Keep in mind, though, that if you cut one of these deals, you could owe income taxes on the difference.
If your lender is unwilling to hear you out and won’t work to find a solution you both can live with, it’s time to hire a lawyer. Most communities offer local homeowners some form of free legal aid. Or you can contact the National Association of Consumer Advocates, which has a list of consumer lawyers nationwide at naca.net. The National Association of Consumer Bankruptcy Attorneys keeps its own list at nacba.com.
Most importantly, don’t despair. The worst thing you can do is become paralyzed by fear or ignore the problem altogether.