Former auditor and investment banker Michael Gregory helped his sister avoid forclosure. Now he runs a website that provides financial information to consumers, including foreclosure help. Avoiding foreclosure can be emotionally stressful, especially when the collection calls start, but all is not lost if you know what to do and take action, Gregory says. "The good news is that more resources exist today for you to prevent foreclosure than at any other time in history. But you must take action right away."
Foreclosure is daunting. But with a little work, you can get up to speed fairly quickly. "If you spend three evenings, making some calls and doing research on the internet, you can begin to get comfortable with the topic," Gregory says. Here's his primer on how to stop a foreclosure.
Step 1: Understand Your Options To Avoid Foreclosure
Modify your loan You can change the terms of your loan (for example, a reduced interest rate, extended maturity, or reduced loan balance) so that you can afford to make the modified monthly payment and stay in your home.
Refinance your loan Some homeowners are able to find a new lender who offers terms they can afford so that you can stay in your home. Perhaps you only have five years left on your mortgage; if you can find a lender who will refinance at 15 years, that'll significantly reduce your payments. This option is most likely for people who have significant equity in their house.
Short sell your home You may be able to get your lender to agree that you can sell your home for less than the amount owed so that they forgive the debt. Lenders are much more amenable to this than they used to be.
Deed-in-lieu Your lender can agree to forgive the debt if you give them the deed to your home and vacate it. Note that it's tough to get lender approval if other debts exist on the home.
File for bankruptcy This, of course, is a last resort.
Step 2: Determine which option is best for you
"It's natural to be emotionally attached to your home, but remaining in it might not be your best solution. You have to step back emotionally so as to make a logical financial decision to avoid throwing good money after bad," Gregory says. First, he recommends determining the maximum monthly mortgage payment you can reasonably afford. If you are currently unemployed, the government may be able to help. Second, determine the equity in your home. Get a Realtor to estimate your home's value, then subtract any liens against your home.
If you have equity in your home, you probably want to try to save it. Even if your home is underwater, you might be able to save it by using a government program designed to keep homeowners in their homes. MHA source here.
However, if your home is significantly underwater, your best economic decision might be to let it go so that you can start fresh.
Step 3: Get the Help You Need
Let the government help. Contact Making Home Affordable. MHA offers plans for mortgage modifications (both first and second), mortgage reduction, short sale, deed-in-lieu, help if unemployed, or relocation assistance if necessary. The free counselors at 888-995-HOPE may point you to a program that can help, and even if they can't, they can help you understand and navigate the process.
Step 4: Understand the Clock
"Time is not your friend in this process," Gregory says. "You need to act now so that you have enough time to jump through the necessary hoops to prevent foreclosure." The first thing to find out is how long it takes to foreclose in your state, which varies. You can do this by typing "how long does it take to foreclose in [your state]" into a search engine.
Step 5: Contact Your Lender and Document Everything
"You might be embarrassed and hesitant about contacting your lender. Don't be," Gregory says. "While lenders prefer that you pay off your existing mortgage, they would rather find a solution than foreclose." Start with the entity servicing your loan to see what programs they offer. Also ask which entity owns your mortgage, as many times mortgages are sold by lenders after they are originated. You might need to contact your lender directly if you are not getting the help you want from your servicer. Gregory says it's kay to document all communication including phone calls—who you talked to, what was discussed, the date of communication — and send an email of your understanding of these items to whomever you communicated with to create a document trail in case miscommunication occurs or you need to hire an attorney.
Step 6: Negotiate Away Deficiency Judgments
Many foreclosure solutions result in the bank not being paid in full (what's called a short sale). Most loan documents allow lenders to file unsecured claims against borrowers for the amount the bank was owed minus what it received. Many lenders will waive the right to file a deficiency judgment, but make sure that you get this in writing from your lender and spend the money to hire an attorney to review any settlement documents before you execute them.
And note that you may be taxed by the IRS on the amount of the deficiency, as the IRS considers that as income you received. It might be possible to avoid this tax if you can claim insolvency; check with a good tax attorney.
Avoiding foreclosure is a complicated, confusing and sometimes scary process. Gregory urges you to take control of your situation, take advantage of the help that's out there to educate you about how to stop a foreclosure. Be diligent and persistent. His website offers foreclosure help and a thorough explanation of your options if you're facing foreclosure.