We’ve written a lot about how to get a mortgage, the buying process and what the indicators say about the current housing market, but we’ve avoided the one giant elephant in the room that must be addressed. We haven’t talked about the flip side, the troubled mortgage. Obviously, we want to educate you enough that you can get the best mortgage possible and have a lot of success with it, but that’s just not always how it goes.
The truth is that as of the last quarter of 2013, over eight percent of mortgages were delinquent (down from a high of 11.27 percent in the first quarter of 2010), according to the Federal Reserve. A delinquent mortgage doesn’t always mean a default is coming, but it does mean that the mortgage holder is in big trouble financially. Any late pays are damaging to your credit, but a late mortgage payment is the most hurtful of all.
People end up in delinquency because they’re in a pickle financially and they don’t know who to turn to, or they think there’s just no way out of their situation. There are certainly some cases that are completely hopeless, I won’t lie, but most people could prevent foreclosure if they would simply reach out and touch someone sooner rather than later. The day your home sells on the courthouse steps isn’t the day to start asking for help, either. Early intervention is way more successful than last minute efforts at preventing a foreclosure, but even if you’ve already missed a payment there are plenty of things you can do to get the wheels of change in motion.
When it becomes obvious that you’re going to miss a payment, you need to ask yourself if you really want to stay in the house. Be honest. Don’t try to stay because you think you have to, or because you bought in a neighborhood because of the schools or your in-laws or what have you. Stay because your home is a place where you’ve made memories you want to hold onto, stay because it has always been a safe place you could call your own, stay because it took you six months to pick the exact right shade of robin’s egg blue for the kitchen because it just *had* to be perfect. Stay because you love your home, because if you don’t, you’re not likely to make the sacrifices it’s going to take to keep it.
Once you decide how much that house means to you, you can decide what to do about your predicament. Late payments will hurt you for a long time, but by making efforts to salvage your mortgage or sell your home as soon as possible, you’ll be able to limit the damage to your credit score.
What Happens During A Foreclosure
If you decide to completely ignore everything your lender sends you about your delinquency, you will have to deal with a foreclosure. Whether or not that’s an experience you can deal with is a decision only you can make. Here’s a quick peek into what happens during a foreclosure to make the decision a little easier — the process varies from state to state, but in general, it goes like this:
15 to 30 days from the day your first late mortgage payment was due, your bank will attempt to contact you and apply a late payment fee to your account. You may get a letter saying that your mortgage is in trouble and suggesting you call your bank right away.
45 to 60 days after the late payment, you’ll receive a much more official letter. This letter, known as a breach or demand letter, explains that you’ve violated the terms of your mortgage and explains your rights at this point in the process. You generally have thirty days to clear up the delinquency and bring your mortgage up to date.
90 to 105 days after your first late payment, your loan company decides that you’re not willing to pay since they’ve not gotten a call or letter from you. This is when they initiate foreclosure using a local firm to begin the foreclosure. In some states, this requires that a notice of foreclosure is filed at the courthouse and your foreclosure is announced in the newspaper. In these states, the court filings and foreclosure hearings will begin shortly.
150 to 415 days, depending on the process in your state, your house will be sold at auction. Before the sale, you’ll receive a notice outlining the time and date of the auction; in most states, you should be completely moved out before this date or you risk having your personal items discarded and the locks changed. If you’ve been saving the money you would have paid toward your mortgage, you should have plenty to get into a rental.
After the sale, some states will allow you a redemption period in which you can repurchase your home if you can somehow come up with the cash. The exact process and terms of the redemption vary widely from state to state, and you’ll most likely need an attorney to help you if you decide to give redemption a try. Most people don’t because they won’t be capable of securing a new loan in that short window, nor do they have the funds to recover their home — if they did, they would have already done it before the foreclosure.
There are a couple of important terms that you should be familiar with in order to better understand what is coming if your loan is delinquent:
Judicial and Non-Judicial States: In a judicial state, your foreclosure must go through state court before the bank can take possession of your home and sell it. Generally the process is much longer in these states, as opposed to non-judicial states, where only a simple document called a Notice of Default is recorded before the bank can sell the property in question.
Currently, the Judicial States are Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin. Expect a much longer process if you live in one of these states. If your state isn’t listed, your foreclosure may be as quick as about sixty days.
Recourse versus Non-Recourse Mortgages: A question many people have after a foreclosure is how much they’re going to owe on their note. In fact, this is probably the scariest part of a pending foreclosure — that potential looming debt. But there’s good news for most homeowners in default.
If the loan that is defaulting is on your primary residence and it’s the original loan you used to purchase your home, it’s very likely it’s a non-recourse debt. Even if you bought your home with a first and a piggyback second, this rule still applies. It’s a huge relief for many troubled borrowers to discover they aren’t going to owe a massive debt at the end of their foreclosure. Unfortunately, if you’ve refinanced your original loan, you may be on the hook for all or part of the remaining debt after the property is sold, so make sure you keep up with the paper trail and call your lender to discuss your options.
Ten Ways to Save Your Mortgage (and Your Credit Rating)
Most troubled borrowers have a number of options to save their mortgages, some require that you part ways with your home, others will allow you to stay there. Depending on which way you want to go with your house, one of these options may be right for you:
1. Deed In Lieu of Foreclosure. If your lender agrees to a deed in lieu of foreclosure, what they’ve agreed to do is trade your outstanding mortgage balance for your rights to the property — in essence, they’re buying your house for what you owe on it. This one actually may not spare your credit score, but that will depend on how your lender reports it to the credit bureaus.
The advantages to you are several. You can negotiate some of the terms of the deed in lieu — for example, you may be able to choose the date you vacate, rather than working on your lender’s schedule. You’ll also be spared the stress and potential embarrassment of a foreclosure, which can be a huge benefit if you live and work in a very small community.
2. Forbearance. Just like with student loans, you can get a forbearance on your mortgage if there is a very good reason for it. Your lender doesn’t want your house back, no matter what anybody tells you — if you’ve lost your job, recently divorced, experienced a serious illness or had some other major life stressor that is temporarily affecting your ability to repay your mortgage, call your lender and ask about forbearance.
You’ll be expected to explain your situation and have a plan in place for rectifying it, if possible. Once your lender looks at the paperwork you’ll have to submit to receive a forbearance, they’ll give you their verdict. If it’s granted, don’t be under any impression that those loan payments will simply be forgiven — you’re only suspending your mortgage, any outstanding debt is still your debt. Interest will continue to accrue, but whether or not you’re expected to make interest payments will be between you and your lender.
3. Loan Modification. Sometimes, the terms of your loan are just making it impossible to keep up with your payments. This is a particularly bad problem for Adjustable Rate Mortgages (ARMs), whose interest rate can fluctuate wildly, causing payments to rise beyond a point where a borrower can comfortably make them.
Any type of loan might be able to be modified, of course, including a fixed rate mortgage. Recasting the debt is a common tactic for fixed rate notes. This essentially allows the mortgage company to re-amortize your mortgage over a longer term, resulting in a lower monthly payment. You’re going to start your 30 year term all over again, but at least your equity will remain intact. Your loan company can choose to do their own modification or utilize the Home Affordable Modification Program if you qualify.
4. Loan Reinstatement. A loan that’s in poor standing due to missed payments and at the risk of foreclosure may be able to be reinstated if you can make up the missed payments quickly. In a reinstatement, your lender basically cancels the foreclosure, puts your loan back on the books and goes on with business as usual.
A reinstatement is much easier to accomplish than a quick refinance and is a good idea if you have a lot of equity or an impressively low interest rate. Your lender will tell you how much time you have to make up those missed payments. You’ll have to hustle, the clock is always ticking, but if you have a tax return coming soon or friends that can make a small loan for you, you may be much better off to reinstate your loan.
5. Repayment Plan. As soon as you get behind on your loan, call your lender. A repayment plan for that past due payment is usually a possibility, but you have to get the plan in place before you get into even deeper trouble by missing another payment. Your lender will expect you to pay your normal payment plus a portion of the missed payments, per the agreement you work out. There will be a lot of paperwork, so make sure you get started right away.
A repayment plan is a good option if you normally have no trouble making your payments. Sometimes people get into short term trouble, lenders understand that and will do everything they can to keep you in your home provided you call them for help. Your repayment plan will stop any further reporting of late pays and put you back in good standing without forcing you to cough up a big chunk of money at once.
6. Partial Mortgage Insurance Claim. Remember that mortgage insurance premium that you begrudgingly pay each and every month? Well, it turns out that if you get into trouble on your mortgage, you may be able to get a one time, interest free loan from your mortgage insurance company to catch up your payments. The loan is treated like a soft second and isn’t due until you refinance, pay your mortgage off in full or sell your home.
A partial mortgage insurance claim can be a good option if your lender won’t consider a repayment plan without a large chunk of money upfront. Not all mortgage insurance companies offer this option, though, so ask your lender before you decide it’s your one and only choice.
7. Principal Reduction. Although home values are increasing, a decent number of homeowners who bought before the real estate bubble burst are still trapped in mortgages that are significantly larger than their home’s value. If you’re one of these unfortunate souls, there are several federal programs available to help you bring your principal back in line with your home’s value, including Making Home Affordable’s Principal Reduction Alternative.
A modified principal amount will also lower your payment, making it easier to pay each month. In addition, if you need to sell your home, you’ll be able to do so at market values, increasing the chances that you won’t need further help in the form of a short sale.
8. Refinance. Provided your missed payment hasn’t yet been reported to the credit bureaus, putting a dent in your credit, a refinance may still be possible. If you have some equity available, you’re much more likely to qualify for a traditional refinance, allowing you to lower your interest rate, payment and potentially remove any mortgage insurance you’re currently paying.
Homeowners who have little to no equity should look into the Home Affordable Refinance Program. This program is designed for exactly this situation — often a principal reduction is part of the mortgage refinance. Your mortgage must still be in good standing to use the HARP program, though, so act right away if you know your mortgage is in danger.
9. Refunding. Refunding is an option for VA loans only, but what it offers to qualified veterans is an opportunity to reset a mortgage walking a dangerous line. If your loan servicer has decided they can’t extend a forbearance or repayment plan to you, the VA will consider repurchasing your loan and taking over the servicing so they can provide more flexibility for you, a process known as refunding.
Refunding prevents foreclosure, but you must be able to make regular payments in the near future. Although the VA claims they will look at each troubled mortgage to see if they qualify for refunding, if you know your loan is in trouble it won’t hurt to preemptively call them for help.
10. Short Sale. Selling your home is the easiest way to get away from a pending foreclosure, but when your home is worth a lot less than you owe, it may be impossible to find a buyer who will take on your extra debt just for the sake of owning your home. That’s where the short sale comes in. In essence, what you’re doing is asking your lender to accept less than you owe for your home when you find a buyer.
Short sales are better for your credit than a foreclosure, but they’re not easy. You’re going to need an experienced real estate professional and a patient buyer. Short sales can take a while to accomplish because every part of the contract negotiation must be approved by the lender, even if the buyer and seller agree. As long as your buyer understands the extra work involved, they’re going to feel like they got a good deal and you’ll be able to escape a home you can’t afford.
The Bottom Line – Communication is Key
Lenders understand that life happens, believe it or not. They also can smell a lie a mile away, so if you call for help, make sure you really need it. If you’d simply rather spend an extra $100 a month on candy than pay your mortgage, you’re going to be out of luck, but borrowers in real trouble have a lot of options to help them through difficult financial times. The industry has faced reality long ago — our economy is sickly and the only way we’re going to get out of this is to work together. No bank wants any more houses to have to deal with, call your lender right away if you think you might be facing a delinquency.