3 Ways To Avoid Home Foreclosure
The news for homeowners struggling to pay a mortgage or home loan is frightening. According to a survey by RealtyTrac, in November 2011, one in every 579 houses received a foreclosure notice.
The survey also found that the rate of foreclosures had increased 14 percent in the third quarter that ended in September 2011.
The good news is that those on the brink of falling into this growing class of Americans have options to save their homes from foreclosure. It begins with awareness. If you fall behind on your mortgage payments, don't ignore communications from your lender. They often have programs or processes that can help you get current on your payments.
For most homeowners facing the threat of foreclosure, there are three available options. You can delay your payments, refinance your loan or modify your loan. Each option has pros and cons.
1. Delay Your Payments
If you lose your job due to an illness or layoff, you can ask your lender for a forbearance period. A forbearance, usually backed by the U.S. Department of Housing and Urban Development's Home Affordable Unemployment Program, establishes a grace period during which you either won't have to make a payment or you'll be able to make a reduced payment. The grace period typically is no longer than 12 months.
If this sounds too good to be true, it isn't. You'll have to agree to a repayment plan that requires you to resume making your mortgage payments and then catch up so your mortgage is current. At some point, you'll want to apply for what's called full reinstatement. You'll need to prove you have enough money to make future payments. If you decide ask for a forbearance period, keep in mind that your lender will probably hit you with late fees, processing fees and possibly others.
2. Refinance Your Loan
There are two different ways to do this: traditional refinancing and non-traditional refinancing.
- Traditional Refinancing: Traditional refinancing is a good way to go if your current interest rate is high and you are concerned that it could rise even higher. A high interest rate, after all, might be why you're having trouble paying your mortgage in the first place. If you've maintained a good credit score, you've continued to make timely mortgage payments and you have equity built up in your house, this option is available to you.
- Non-Traditional Refinancing: One of the most common non-traditional refinancing programs is through the U.S. Department of Housing and Urban Development. Its Home Affordable Refinance Program (HARP) is for homeowners who are current on their mortgages, but have no or negative equity in their houses. HARP will require you to fill out a new loan application and pay refinancing fees. To be eligible, your mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, and it must have been sold to them on or before May 31, 2009.
3. Modify Your Loan
If refinancing your mortgage isn't an available or beneficial option for you, there are ways to modify your current loan.
- Traditional Modification: A traditional modification will require you to negotiate new terms for your mortgage. An underwriter will figure out what you can afford, you will have to prove your ability to make the new payments and the lender will consider whether it makes more sense to continue the loan under the new terms or proceed with a foreclosure.
- Home Affordable Modification Program: If you have a loan held by Freddie Mac or Fannie Mae, you may be eligible for the Home Affordable Modification Program. Homeowners who spend a large portion of their income on their mortgage can reduce their payments to no more than 31 percent of their pre-tax income.
- Principal Reduction Alternative: If your house is worth less than you owe, you might be eligible for something called a principal reduction alternative. A principal reduction alternative reduces the amount you owe on your home. More than 100 lenders, including large banks, offer some form of this.
- Second-Lien Modification Program: If you have a second mortgage on your house and you have already altered the first mortgage through the Home Affordable Modification Program, ask about a second-lien modification program, also known as a 2MP. Under a 2MP, when a homeowner’s first lien is modified under HAMP, the lender must offer to modify the second lien.
The truth is that most lenders do not want to foreclose on your mortgage and will work with you to keep that from happening. Communicating with your lender and demonstrating your willingness to find a solution and make good on your debt will help preserve your options. Working with a helpful lender and doing your homework about available programs can help stave off foreclosure and keep your home and your credit intact.