© Andy Dean Photography / Shutterstock.comLenders may take a soft approach to early mortgage delinquencies, hoping you can get back on track. Unfortunately, when you can’t get back on track, they can take a hard line on foreclosures. If you owe a past-due balance on a credit card, you’ll get phone calls and letters that feel like harassment. Mortgage holders aren’t nearly as aggressive when you’re late on your payments. After all, they have security for their loan: your home. To them, that dwelling you live in is collateral that can be sold to recoup their losses.
This article outlines ten things you need to know and do after you realize you aren’t going to be able to pay back the mortgage but before you leave or are asked to leave your home.
Know when you’re in trouble
You aren’t in trouble if you owe more than the value of your home. You aren’t in trouble if your roof leaks and you can’t afford to fix it (although that may be an early warning sign). You may be in trouble if you can’t pay your real estate taxes, but chances are, your unpaid taxes won’t result in the bank calling. But you are definitely in trouble if you are late on your mortgage payments and have a feeling you’re on the edge of a cliff and at any moment could fall off and into the foreclosure abyss.If you’re late on a single payment, you can probably just catch up. There may be a late fee, a hike in interest rate, or a penalty. At that point, it’s financially advantageous for your lender to say, “Thank you, but this fee is a reminder to not be late again.”
On the other hand, if you’ve fallen several months behind, your mortgage lender might say, “No thank you!”
Why would they do that? It’s complicated, but basically, here’s how it works: Because most mortgages are packaged into securities and sold in bulk to investors, the default terms for all the mortgages in the “package” must be spelled out in great detail and generally be the same. The result is a rigid set of rules that were made up in advance and have very little flexibility when applied.
It’s not that your lender is an unfeeling automaton. As people, they do care. But legal agreements and contracts spell out what they must do. If you’re more than 90 days late and you try to make a payment or even two, there is an excellent chance that your money will be refused and returned to you. You may need to make up all your payments at once to get any payment applied to your mortgage. A day late is indeed a dollar short when it comes to home mortgages. To further complicate matters as only bankers and lawyers can, the 90-day payment cliff does not include your grace period (typically 15 days).
If you’re late on your mortgage, it’s vital that you open and answer your mail. The notices you receive generally offer good information about your options. The sooner you seek help, the more options you’ll have to save your home.
Know how your state’s laws treat foreclosures
Every state has its own foreclosure laws. It is important to know how your state’s laws work so that you don’t inadvertently cross a line or miss an important date. You can find summaries of the laws for all states at www.foreclosurelaw.org. The following sections outline a few critical differences.Nonrecourse or recourse
If your lender is foreclosing on your mortgage, whether you live in a “recourse” state or a “nonrecourse” state makes a big difference. In general, if you live in a nonrecourse state, you can’t be held liable for any deficiency between the amount you owe and the amount your home sells for in the foreclosure. If you live in a recourse state, the lender may get a deficiency judgment against you in court. For example, if you owe $200,000 on your mortgage but your home nets only $150,000 at the foreclosure sale, the deficiency is $50,000. You would then be responsible for paying that “deficiency” of $50,000.But knowing which states are nonrecourse states isn’t enough. Some states define certain loans as nonrecourse if, for example, they were used only to purchase a home; but, if part of the proceeds of the loan were used for some other purpose, like paying off credit card debt, they define it as recourse. Other states limit the amount of the deficiency to the fair value of the property versus the sale price. Still other states have a one-action limit. For example, New York makes lenders choose between the acts of foreclosing on the property and suing to collect the debt.
Consult a housing counselor certified by the U.S. Department of Housing and Urban Development (HUD) or an attorney to get definitive information about the rules for your state.
State nonrecourse rules don’t apply to the IRS. If you lived in your home for less than two years, you may not qualify for the $250,000 individual home sale exclusion, so you may have a capital gain or phantom income from a foreclosure. See your tax professional for advice.
Judicial or nonjudicial
It is important to know whether your state handles foreclosures on a judicial or nonjudicial basis. If you live in a nonjudicial foreclosure state, your lender does not have to go to court in order to foreclose on your home. This means that the foreclosure can proceed more quickly. In judicial states, foreclosures go through a court. These are called judicial foreclosures and may take longer to finalize.The nonjudicial states include Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner requests a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.
Time is your enemy in a nonjudicial state. Lenders are required to give very little notice of foreclosure sales, and once the foreclosure process begins, you may have no further options.
Decide whether to stay or go
This decision used to be a no-brainer. It was a matter of pride. People would do everything they could to keep their house. The stigma of losing the roof over your head was a big one. Today, though, the decision is often less about emotion and more about the math. Faced with seemingly unrecoverable deficits, some homeowners crunch the numbers and decide to save time, money, and stress by letting the foreclosure process run its course. Some move out, and others stay until the home sells to a new owner or the bank forces them to leave. The following sections describe your options.Walking away
Strategic default is a new term in the language of mortgages. When the housing bubble burst in 2008, some properties went so far underwater (more is owed than the home is worth) that it seemed that it would take years or even decades for the home to regain the value of its mortgage — or it never would. Some borrowers choose to stop making payments, even if they can afford to make them, because they see their house as just another investment, and a bad one at that. Walking away is known as a strategic default.Potential drawbacks to strategic default include deficiency judgments, significant credit score damage, problems buying or renting in the future, the personal impact of a major life failure, and to a much lesser degree these days, stigma in the eyes of others.
Working with the lender to exit
A more lender-friendly version of a strategic default is the deed-in-lieu of foreclosure option. Rather than go through a long and expensive foreclosure process in order to obtain title, the lender agrees to accept the deed to the property. This option may also incur a deficiency judgment for the difference between the fair market value of the property and the total debt owed. You’ll still see damage to your credit scores and possibly a “deed-in-lieu” notation on your credit reports.Another option in this category is a short sale, which involves selling your home for less than what you owe. If you choose this option, you may be subject to a deficiency judgment, depending on the terms you work out with your lender and the laws in your state. A short sale will have an equally serious effect on your credit scores, but don’t look for the term short sale on your credit report. It’s an unofficial phrase that was created to more gently describe settling your loan, and your lender will report the mortgage as “settled.”
In March 2013, Fannie Mae and Freddie Mac began letting some borrowers who are current on their payments give up their underwater properties and cancel the debt under their Mortgage Release and Standard Deed-in-Lieu of Foreclosure programs. If this option is of interest to you and you have a Freddie Mac mortgage, the website has more information. If you have a Fannie Mae mortgage, go to its website for more info.
Staying the course
If you decide to do all you can to stay in your home, several courses of action are open to you. The major ones include the following:- FHA Short Refinance: If you owe more than your home is worth and you want to refinance, the lender can reduce the amount you owe on your first mortgage to no more than 97.75 percent of your home’s current market value.
- Loan modification/refinancing: The two main types are the Home Affordable Modification Program (HAMP) for Freddie Mac and Fannie Mae mortgages and conventional refinancing for others. A conventional mortgage servicer or lender may modify your loan to make it more affordable, but each one has its own programs and guidelines. Speak to your servicer about HAMP. If your loan is owned or guaranteed by Freddie or Fannie and you are ineligible for conventional refinancing, HAMP can change the type of your loan from adjustable to fixed, to a longer fixed term, or to a lower interest rate and can add past-due payments to the principal balance to be repaid over the full mortgage term.
- HUD Foreclosure Avoidance Counseling: HUD offers free counseling to anyone who may be faced with foreclosure. They may be able to help you find alternatives to losing your home, or help with special loan programs to modify or refinance your mortgage or reduce your monthly payments to help you keep your house. Find a HUD counselor near you.
- Assistance because of a natural or declared disaster: Hurricanes, fires, earthquakes, tornadoes, volcanoes, and global pandemics can put lots of people in situations beyond their control. During times of disaster, federal and state governments, lenders, and credit reporting agencies may offer special relief programs. If you’ve been affected by a disaster, check with your lender about payment accommodations, such as forbearance or deferment, to help you maintain your mortgage payments through a period that is beyond your control.
Tighten your spending to stay in your home
Whether your financial life has a ding or two or is upside-down, tightening your budget can help you free up sorely needed cash and get back in control of your situation. If you don’t have a budget, now is the perfect time to make one.Making a budget is basic but effective. Begin by listing all your expenses and then list your income. Look carefully at both sides of the equation, make some cuts to expenses, and look for ways to add to your take-home pay (like reducing your tax withholding) or increase your income with a part time job. For example, if the bank forecloses, you’ll lose your cable TV anyway. Cutting cable now may give you the extra cash that helps keep you in your home.
Technically it’s not a spending cut, but you can also try to sell some stuff to raise cash for a mortgage payment. We’ve all seen the “Cash for gold!” signs. Selling old and unused gold or jewelry is something you may want to consider. Having a yard or garage sale, downsizing to one car, and selling your violin should also be on your list. You get the idea. Lightening your load of stuff may buy you the time you need to catch up.
Prioritize your spending to build cash
No matter what you choose to do in the event of a mortgage crisis, you’re going to need some cash. It may be to pay an arrearage. It may be to come up with first and last month’s rent and a damage deposit on a new apartment. Either way, you need to tighten your budget (or create one; see the preceding section). Yes, this step is basic, but as with everything in life, you have to start at the beginning. As described in the preceding section, list all your expenses and then list your income. Take a look at both sides of the equation and determine where you can make changes — by cutting expenses and/or increasing income.Car repossessions can happen within weeks — not months — of missing a payment. So, if you need your car to get to work, keeping up on your car payment is critically important.
If you can’t make your mortgage payment, it’s important to save as much of the money you’re not sending to your lender as possible. If your payment is $1,000 and you can only scrape together $800, don’t spend it on something else. Put the money aside to help ease your transition into a new place.Want some help with creating a spending plan? Try a nonprofit consumer credit counseling agency member of the National Foundation for Credit Counseling. Organizations like Operation Hope also offer money management programs. There may be a Hope Inside center near you.
Lessen the damage to your credit
In a nutshell, if you stiff your mortgage lender with a loss in the form of a short sale or foreclosure, your credit will take a much bigger hit than if you come to an agreement to repay or forgive any deficiency.For a person with decent credit and a FICO score in the 720 range, the difference in credit score deduction between a short sale with a deficiency and one without can be more than 50 points.
Know who to call
You know that you have the right to remain silent, and remaining silent can be wise in some situations, but not when you’re facing a mortgage crisis. If you’re behind on your payments, your lender will communicate with you by mail. The worst thing you can do is to remain silent, which could leave the bank no other option than to take legal action.The best thing you can do is to open your mail and speak to your mortgage servicer at once. I also strongly recommend that you contact an independent HUD-approved mortgage counselor or your state housing agency. Avoid foreclosure-prevention companies like the plague they are. The best help is easy to find and available for free.
Beware of scams
It’s easy to forget a lifetime of wisdom when the pressure is on and you are desperate for a solution. Knowing that you’re vulnerable during a mortgage crisis, scammers will try to charge you money or even trick you into signing your deed over to them. Keep in mind that not everyone out there wants to help you; many just want to help themselves.Here are some tips to avoid being scammed:
- Never pay a fee in advance. The best help is free.
- Never believe someone who guarantees that they can stop your foreclosure.
- Be wary of anyone who contacts you and offers to help. Always get a second opinion from a person or an organization you trust.
- Never hand your mortgage money over to anyone other than your mortgage servicer.
Beef up your credit
As soon as you default on your mortgage, your credit scores will take a nosedive. You likely won’t be able to qualify for new accounts for quite a long time. Now is the time to take steps to improve your credit as much as possible so you can be in a position to move forward.Pay down as much debt as you can, especially on your credit cards. If you’re not making the mortgage payments, put the money toward your credit card balances. Lower credit card balances will help you bump up your scores and reduce your debt burden after the foreclosure proceedings have completed.
Try not to take on any more debt. Any purchases you make should be essentials. It’s why having a budget it so important. Digging yourself deeper into debt when you can’t pay what you already owe will only make things worse.
Take advantage of other new tools that can help bolster your credit scores, as well. Having things like your on-time cellphone, utility and video streaming payments added can help bolster your credit scores. Services like Experian Boost can be worth looking into. Just be sure you understand what you’re signing up for. Although these kinds of services are free from a cash point of view, you’ll likely get marketing offers to tempt you to open your wallet. Be prepared to say no thank you. You may sign up for alternative scoring systems like UltraFICO, that incorporate information not included in credit reports. Lenders may consider that information in addition to the traditional scores to approve your application.
If you lose your house, you may find yourself renting. Studies have shown that doing so almost always helps build your credit. Talk to your landlord about having your positive rent payments reported or sign up with a rent payment service yourself. Here are a few options:
You should know that there may be a nominal fee for these services to report your rent payments, so compare their offers to find the one that’s right for your situation.Consult an attorney
You have rights and you have legal options. Only an attorney can give you sound legal advice, so before your mortgage crisis gets too far along, spend the money to get a competent assessment of where you stand and what the law can do to help.For example, a bankruptcy filing can stop a foreclosure in its tracks — probably not forever, but maybe long enough. A Chapter 7 or 13 bankruptcy may be a way to reduce other debt or the amount of your mortgage that exceeds the value of your home. It may be enough to get you back on track with your mortgage payments. Also, not all mortgage documents are properly drawn and executed. Have a lawyer review your files to see if they are unenforceable or flawed in any way.
Bankruptcy is a last resort. It’s the most serious financial decision you can make related to your debts. It’s there for a reason, but that reason is that there is no other financial option.
A good lawyer who does a lot of foreclosure-prevention work can sometimes work minor miracles, maybe even delaying foreclosure for years, which can help you begin to build your savings account to pay for your next move, or maybe even keep your house.
