If home ownership is the American dream then a foreclosure is a homeowner’s worst nightmare. Thousands of people face this situation every day because they are struggling financially and have failed to pay the mortgage. It can definitely lead to some sleepless nights worrying over whether or not the bank will come take your home.
Avoiding foreclosure is extremely important for several reasons. For starters, it damages your credit score. You may see a drop of 200 points or more even if you had perfect credit beforehand. In addition, the information stays on your credit report for seven years. This makes it very difficult to secure a new mortgage loan or open other lines of credit in the future. It’s a stain on your personal financial record that takes years to overcome.
How to Avoid a Foreclosure
In the end you may have no choice but to foreclose. However, don’t assume all hope is lost because you may be a month or two behind on the mortgage.
Typically the process doesn’t start until you fall four months behind. You will also be formally notified before the proceedings begin so there is a little time to work through your financial struggles.
Follow these suggestions to avoid taking the foreclosure route:
1. Don’t Ignore the Problem
We tend to ignore problems more often when we are upset. You’ll be tempted to ignore that mortgage bill and letters from your lender because they are constant reminders of your current financial struggles. That’s entirely the wrong tactic.
Saving your home from foreclosure will require you to be proactive. You should contact your lender at the first sign of trouble. While on the phone with them be prepared to explain:
- Why you cannot make payment
- If it is a temporary or permanent problem
- Your financial position including income, expenses and current assets
Mortgage lenders will work with you to resolve the problem. You’ll have more options to consider the sooner you contact them.
2. Review Your Income and Budget
After the phone call to the lender, the next step is to analyze your income and budget. Ask yourself:
- Are there opportunities to earn some extra income with a part-time job?
- Can I cut unnecessary expenses from the budget?
- Are there ways to reduce some of my other bills?
When your house is on the line all expenditures should be scrutinized. See if you can spend less on food, clothing, utilities, cable, phone or Internet service and insurance premiums. It may be painful and inconvenient to cut back in some areas but that will not be as painful as losing your home.
Plus, by making these sacrifices, you demonstrate to the lender you are serious about not losing your home.
Most importantly, no matter how bad the situation gets, stay in your home. Don’t abandon it because you are behind on the mortgage. You may lose the chance to quality for assistance if you leave.
3. Bring in a Counselor
Asking for help is always tough but you shouldn’t be ashamed to bring in a housing counselor. Sometimes a fresh set of eyes can see the problem in a new light. A counselor can help you analyze your budget and suggest viable options you have not considered. They can also instruct you on how to work with the lender or even negotiate on your behalf.
On a note of caution though, beware of foreclosure related scams. There are con artists seeking to take advantage of homeowners in desperate situations. Know how to spot a foreclosure scam and then report it if you become suspicious.
4. Alter the mortgage
As you work with the lender it may be possible to alter the terms of the mortgage. The lender may offer you a special forbearance, where they provide a temporary reduction or suspension of all payments until your financial situation improves.
Lenders can also “reinstate” your loan if you can pay a lump sum by a specific date to take care of all the back payments.
They may also be able to modify the loan entirely. Lenders have the ability to change the interest rate on the loan or extend the number of years to payoff the loan. They may even be able to offer you a second loan that you could use to bring the delinquent account current.
5. Get Rid of the Home
If all else fails, you need to get rid of the home through a regular sale or a short sale where the lender allows you to sell the property for less than you still owe. Selling a home is not the outcome you were looking for but again it’s better for your financial future than having a foreclosure on your record.
Sometimes our lives do not go as planned. Struggles occur that put serious strain on our finances. By being proactive and following some basic steps you can avoid adding a foreclosure to that list of struggles.
Questions: Have you ever been faced with a foreclosure? Were you able to keep it from happening? What other suggestions would you give to someone facing this situation?