Steps You Can Take to Avoid Losing Your Home and Ruining Your Credit
Are you one of the millions of homeowners who went for one of those enticing variable or adjustable rate mortgages only to see your monthly payment, which started off low, continuing to rise, escalating to the point where it's harder and harder, or even impossible, for you to keep up your payments?
Unfortunately, this is an all-too-common scenario being played out across America.
According to the Mortgage Bankers Association (MBA), an estimated $1.5 trillion in adjustable rate mortgages (ARM) are going to see another increase in interest rates this year alone. The MBA predicts this will prompt homeowners to refinance about $700 billion worth of those adjustable rate mortgages.
Skyrocketing adjustable rate mortgages are one of the reasons that foreclosures have been on a steady increase.
Realtytrac.com says foreclosures in the U.S. were up 42 percent in 2006 from the previous year. Overall, one foreclosure was filed for every 92 U.S. households last year. The Detroit-Dearborn area had the most foreclosures-one for every 21 households.
Fortunately, there are less damaging solutions than a foreclosure -- such as refinancing or even filing for a certain kind of bankruptcy. So before you put in a call to your local loan shark take a look at some better options that don't come with a clause for "kneecapping."
The first and possibly best option to consider is refinancing. Today, if you qualify, you can actually switch to a fixed-rate loan for nearly the same interest rate as an adjustable. This means the interest rate on the loan stays the same for the life of the loan and you no longer have to worry about rising interest rates.
The problem is that an increasing number of homeowners can't do that without forking over something called a "prepayment penalty," costing thousands of dollars.
These penalties tend to apply to those adjustable-rate mortgages that have low teaser rates that balloon up once the introductory period ends as well as option-adjustable rate mortgages where you can make interest-only payments or in some cases even less than interest-only.
Another obstacle to refinancing is the current slump in the housing market where values of some homes have decreased to below their purchase price. This has lenders tightening credit standards, thus making mortgages as well as refinancing harder to get.
A survey conducted by the Federal Reserve Board found that 15 percent of all U.S. banks have tightened their credit standards on residential mortgage loans in the past three months. That's the highest percentage of banks since the early 1990s.
This means some lenders are demanding proof of income, minimum credit scores, and at least some kind of down payment.
Banks aren't the only institutions clamping down. Some mortgage companies that built their reputation on lending to those with less than stellar credit ratings are discontinuing some so-called "exotic loans" that allowed homeowners to borrower 100 percent of the purchase price.
Most Lenders Want to Avoid Foreclosure
One thing to understand when faced with a possible foreclosure is that the banks or mortgage companies don't want it any more than you do.
They lose money too because houses sold in foreclosure often sell for less than the amount left on the mortgage. So they'll usually work with you to come up with an alternate solution. For example, Bank of America is allowing some borrowers with high interest adjustable rate mortgages to refinance into a different loan at no cost.
It's up to you, however, to contact your bank or mortgage company to see if refinancing with another loan is even possible. The sooner you do this, the better. Some states have foreclosure laws that give you more time than others.
However, if you live in Texas, you have less than a month to make an overdue payment before the foreclosure process begins.
Modify Your Current Loan
If refinancing isn't available, try to work out a plan with your lender to modify your current loan that would allow you to make either a smaller payment, or to miss a payment until you have the funds.
This option is possible if you can prove that you will have money coming in the future, such as from an anticipated tax refund, an inheritance, a bonus, or any other future income, or from payments you are owed for work you've already completed.
You will have to prove the money will be forthcoming. Your lender may insist this be done by a certain date.
Another possibility would be to modify the loan to spread out past money-due by adding portions of it to the regular monthly payment until your payments are up to date.
Sell Your Home
If foreclosure is on the horizon, and refinancing or modifying your loan is out of the picture, there's another possible solution before filling for bankruptcy: put your home up for sale.
Even if you can't get the full market price, it's better than the lender repossessing the property, in which case you'll get nothing.
Obviously, time could be a factor here. If you are being forced to sell your home to avoid foreclosure, you might not be able to wait for a better offer as you could do if you were not racing against the clock.
There are other factors besides time that will influence what price you could get, e.g. how much in demand your particular community is right now, the condition of your house, or even the type of house you are selling.
Some lenders, in order to avoid foreclosures, are offering to let you sell the property for less than the total amount due on the mortgage and then forgive the remaining debt. But it will depend on whether this option would cost the lender less than foreclosing. If you consider this option, borrowers have the added advantage of not having to put a foreclosure on their credit report.
Will Mortgage Insurance Help?
If you think that private mortgage insurance you had to buy because you put less than 20 percent down is going to help you avoid foreclosure, forget it. You may have paid for this insurance, but it's the lender who benefits, not you.
That's because mortgage insurance is paid out to a lender when it can't recover its costs after foreclosing on the loan and selling the mortgaged property. You still lose everything.
Beware of "Rescue" Scams
One such scam is called "equity skimming" whereby a phony buyer offers to pay off your mortgage if you agree to move out and give him or her the deed to your property. The buyer will then sometimes rent out the property. But what he or she doesn't do is make any mortgage payments so eventually the lender is forced to foreclose.
Other scam artists will offer to provide, for a fee, things you can do on your own for nothing, such as working out a new payment plan with your lender.
Legitimate Foreclosure Services
There are legitimate organizations that help financially strapped homeowners avoid foreclosure and most of them are certified by the U.S. Housing & Urban Development [HUD] Department.
One of them is the Home Ownership Preservation Foundation [HPF]. It works with people nationwide to help homeowners set up budgets and mortgage payment plans. You can all them at 1-888-995-HOPE or go to their website at www.hpfoonline.org.
The Bankruptcy Option
If all other options are exhausted, and the only thing standing between you and foreclosure is to declare personal bankruptcy, enter this financial arena with caution. Also keep in mind that filing for personal bankruptcy could cost from $1,500 to $5,000.
There are two kinds of bankruptcy so make sure you choose the right one.
Chapter 7 erases all debts including your mortgage. But that doesn't stop your lender from putting a lien on your house and foreclosing which means you can be out on the street within weeks depending on your state's foreclosure law.
Chapter 13 reorganizes your debts. You still have to pay off your debts but you'll have three to five years to do so. This gives you extended time to pay off those mortgage payments you missed, and it allows you to continue living in your home under a new mortgage payment schedule.
Don't try to file bankruptcy without a lawyer. The forms you can buy online are not adequate. If you qualify, you may be able to get reduce-fee or even free legal counsel from Legal Aid or other not-for-profit organizations in your community.
You can also call your local Bar Association and inquire about attorneys who will work "pro bono" (free) or at a reduced rate for clients in true financial distress.
A word of advice: Don't ask for free legal advice unless you are truly desperate. Contrary to popular opinion, lawyers have to eat too.
Heading Off Foreclosure
Admitting you're in financial trouble is hard for most people. But don't let it stop you from taking action as soon as you think you may be facing difficulties when it comes to keeping up with rising adjustable rate mortgage payments.
Don't think you're the first person to hit a rough spot. Nearly all of us have been there. Don't be shy about asking for help.
As noted earlier, most lenders want to avoid foreclosure as much as you do. Work with them. Get help from legitimate agencies to manage your debt. And remember, there are options to avoid foreclosure. Use them.