Home Ownership: Tips to Avoid Foreclosure

 
HOW CAN I AVOID MORTGAGE TROUBLE?

  • Prioritize your expenses. Prioritize your bills and pay the ones that are most necessary for the well-being of your and your family (i.e. shelter, food, utilities)
     
  • Protect your credit. Remember that making late payments or skipping them may seriously damage your credit score.
     
  • Beware of scams. Beware of predatory lenders, pre-approved loans, and fraudulent counseling agencies. Legitimate counseling agencies will provide services free of charge or for a small administrative fee. Consult an attorney or your mortgage company before signing anything that may affect your home. If you don't understand it, don't sign it.


WHAT SHOULD I DO IF I MISS A MORTGAGE PAYMENT?

  • Call for help. It's the most important thing you can do. More than 50% of homeowners facing foreclosure did not call for help when they fell behind on their mortgage payments.
     
  • Don't ignore the situation. It won't go away. Open and respond to every piece of mail from your lender. Address the issue promptly to protect your home, your family, and your credit score. Many times foreclosure may be avoided.
     
  • Notify the bank as soon as you know your payment will be late. Calling when you are 30 or 60 days late is better than calling when you are 120 days late. You still have some options. Remember that banks do not want your home! It is almost always a significant financial loss for a bank to foreclose on a home.
     
  • Be willing to work it out. Depending on your situation, the lender may lower the interest rate, lower the monthly payment, or enter into a repayment agreement for missed payments.
     
  • Avoid foreclosure rescue scams by consulting a reputable nonprofit organization. Homeowner's HOPE™, (888) 995-HOPE, is an independent, third-party resource that is part of a HUD-certified, not-for-profit network dedicate to helping homeowners. HOPE counselors are trained to set up a plan of action designed just for you and your situation. (Spanish speaking counselors are also available; llame español.) As with your bank, call the moment you recognize you may be facing difficulty.


I CANNOT MAKE A PAYMENT. WHAT ARE MY OPTIONS?

  • Forbearance. You are allowed to delay payments for a short period, with the understanding that another option will be used afterwards to bring the account current.
     
  • Reinstatement. When you are behind in your payments but can promise a lump sum to bring payments current by a specific date.
     
  • A Repayment Plan. If your account is past due, but you can now make payments, the lender may agree to let you catch up by adding a portion of the past due amount to each current monthly payment until the account is current. Six large mortgage lenders recently unveiled a plan - Project Lifeline - to offer a 30-day "pause" in the foreclosure process to allow a homeowner the opportunity to negotiate an alternative repayment plan. Those eligible homeowners will receive a letter from their lender explaining their eligibility.
     
  • Modifying Your Mortgage. The lender may modify your mortgage to extend the length of your loan (or take other steps to reduce your payments). One solution is to add the past due amount into your existing loan, financing it over a longer term.
     
  • Selling Your Home. If catching up on payments is not possible, the lender might agree to put foreclosure on hold to give you some time to attempt to sell your home.
     
  • Short Sale of Your Home. The lender may agree to allow you to sell your home for less than the remaining balance of your mortgage, forgiving the remaining balance. In this case, a temporary change to the Internal Revenue Code may shield you from being obligated to pay income tax on the forgiven portion of your balance, referred to as Cancellation of Debt (COD) Income. To be eligible for this exemption from COD income tax liability you must meet both an Ownership and Tenure requirement.
     
    • Ownership: You owned your house for at least two years out of the last five.
    • Tenure: The house was your primary residence for at least two years of the last five.
       
  • Property Give-Back.  The lender can allow you to give-back your property - and then forgive the debt. Give-backs do, however, negatively impact your credit score, though not as severely as a foreclosure. The lender might require that you attempt to sell the house for a specific time period before agreeing to this option, and it might not be possible if there are other liens against the home.


HOW CAN I REDUCE FORECLOSURE RISK?

  • Take advantage of pre-Purchase counseling. Homeowners can avoid trouble later by making informed decisions when purchasing their homes. Borrowers who are most likely to keep their homes understand their mortgage options and how much they can really afford. Education also helps borrowers identify and avoid unscrupulous, predatory, or fraudulent sellers or lenders. A recent study found that borrowers who received counseling have 50% less default risk than those who forego pre-Purchase counseling.
     
  • Avoid prepayment penalties and balloon payments. People who refinance their mortgages with loans containing prepayment penalties or balloon payments are more likely to undergo foreclosure, according to a study conducted by researchers at the University of North Carolina. A prepayment penalty increases foreclosure risk by 20% while balloon payments increase foreclosure risk by 46%.
     
  • Stay current on home repairs and maintenance. Emergency repairs and unqualified contractors push homeowners past the threshold of financial manageability far too often. Organizations, such as NeighborWorks® (www.nw.org), provide counseling in home maintenance and repairs and renovations that improve the value of a home.


ADDITIONAL RESOURCES

The information provided on this resource is compiled from NeighborWorks®, the Washington Post, the Congressional Research Service, U.S. Dept. of Housing and Urban Development, and other sources.