Unbiased Financial Information Provided by Financial Finesse
Foreclosure is the legal means a lender can use to repossess your home after you've missed several mortgage payments. A foreclosure can affect your credit rating for up to ten years and this can have devastating effects on a family's finances. Preventing the loss of your home is worth fighting for and you can take steps to prevent it. Your course of action depends on what stage of the process you are in at the time.
The first stage is when you are struggling to make payments and are often late. Concerned that if you don't change your course now, you may be headed for foreclosure? The first place to start is to prioritize your spending and find places to cut. According to the US Housing and Urban Development Department, "After healthcare, keeping your house should be your first priority."
Track your expenses. Pull out your checkbook register, ATM receipts, and credit card receipts and tally them up. Use a three month period to get a good sample. Find places to trim that free up the most cash such as dining out and entertainment. Carpool, take the bus or train to work to reduce transportation costs. Redirect the savings to make your payment and/or build your emergency fund.
The second step is to generate extra income to make your payment. Take on extra hours at work, get a second job or sell nonessential items to generate cash. Do you have a boat in the garage or a saxophone in your closet? Sell them in the want ads or online. Turn a hobby into a second job. Do you like to sew? Offer to do alterations for the local dry cleaners or make crafts and sell them at local craft fairs or flea markets.
If credit card bills are mounting along with the mortgage being late, consider going to a credit counseling agency to help you restructure that debt. If you can reduce your other bills, it frees up money to make your house payment. Look for a reputable agency, preferably a non-profit credit counseling agency. Some places to start are:
- National Foundation for Credit Counseling 1-800-388-2227
- Federal Trade Commission - Choosing a Credit Counselor
- Directory of non-profit debt counseling agencies
The second stage is when you are behind on a mortgage payment. Now is the time to get on the phone with your lender and discuss what options you have. Lenders really don't want to foreclose on your property; it's expensive and time consuming. They have programs to help you through rough spots so that you can bring your loan current.
One program is called a special forbearance option. If you show the ability to pay, the lender may restructure your loan and allow you to make the past due payments over a fixed period of time. Lenders also offer mortgage modification. In this plan, the lender will either refinance the debt or extend the term of the loan. In either case, this modification is intended to reduce your monthly payment to an affordable level. They may also switch the loan from an adjustable rate mortgage to a fixed rate mortgage so you are not subject to future loan increases. Call your lender to see what programs they offer and what you qualify for.
The third stage is when your lender is starting the foreclosure proceedings. At this point, you have exhausted all of the above options and are not able to make your mortgage payment. Your strategy becomes trying to sell the property and get out from under the debt to save your credit rating. There are a variety of options here.
- A pre-foreclosure sale. Sell your home before it goes into foreclosure. To attract a buyer, you will generally need to discount the price. This sale will not hurt your credit rating.
- A deed in lieu of foreclosure. You offer to sign over the property to the bank. If they accept the offer, the property becomes "bank owned property" and they take over the deed and attempt to sell the property themselves. This does adversely affect your credit but not as badly as a foreclosure.
- A short sale. With this strategy you negotiate with the bank to sell them the property or you find a buyer at an amount below the value of the loan. The lender must approve this because they will be taking a loss. They might consider this option when the financial loss is less than the cost of foreclosing. The buyer benefits because they may get the property below market value.
Whatever stage you are in, there are steps you can take now that will make a difference in your financial future.
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