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Money June 2013

Dollar Sense

What to Do When Foreclosure Rears its Ugly Head

By Teresa Ambord

Don’t accidentally sign away your title. This may sound like a no-brainer, but there are companies that will claim to be able to halt a foreclosure process if you sign their form, allowing them to act on your behalf. Don’t believe it.

If you are like many people these days, you might be worried about the possibility of losing your house. If not, you probably know someone who is. Right about now, anyone in danger of foreclosure probably hates the bank, but you should know, the bank does not want your house. That’s not to suggest that all bank personnel in all cases have acted honorably. But in general, the bank that holds your mortgage is not in the real estate business and would rather you stay in your house, paying your loan.

Here are some tips from the U.S. Department of Housing and Urban Development (HUD) to help those who are having trouble keeping up with house payments.

    1. Face it head on. The problem will not go away if you ignore it, and the longer you wait and further you get behind, the harder it will be to reinstate your loan. That’s when the danger of losing your home escalates.

    1. Call your lender right away. When you realize you’ve got a problem, reach out to talk to your lender as soon as possible. You no doubt feel threatened, but rest assured the bank does not want your house. They have options that may help your save your house.

    1. Open the scary letters. If you go to your mailbox and find a letter from your mortgage holder, it may be tempting to set it aside. But you should know the first letters you receive may be good letters, containing helpful information about how to prevent foreclosure and get through these tough times. But – you have to act. As time goes on, the good information turns to notices of pending legal action. If you end up in court, failure to open the mail is not a viable excuse.

    1. Determine your rights. When you bought the house, your lender gave you documents that say what could happened if you fail to make payments. These documents lay out your rights. Foreclosure laws vary by state. You can find out what the laws are in your state by contacting the state government housing office.

    1. Learn the options. Start by contacting HUD and talking to a HUD-approved housing counselor. These counselors are provided free, nationwide. They can help you understand the law and your options. They can also help you get your finances organized, and will represent you in negotiating with your lender if you need this help. (See sidebar for more details.)

    1. Prioritize spending. You may be under a boatload of debt, but make your house payment the first priority. Take a hard look at what you are spending and eliminate what you can, like cable TV and expensive phone plans, memberships. Put credit card payments and other loan payments on hold as long as you can, to get your house secured.

    1. Take a look at your other assets. If you have a whole life insurance policy, this could be a source of cash. Also look at what you can sell (a second car, expensive jewelry, etc) to raise cash. Is there someone in the household who can get an extra job, even a few hours a week? If you’re way behind on your mortgage, you may not be able to raise enough through these methods to get you up-to-date, but your efforts will demonstrate to your lender that you are serious.

    1. Don’t get involved with a foreclosure prevention company. This will waste money you need to pay your mortgage payments. Some of these companies are legitimate, and some are looking for the next easy buck. But legitimate or not, they may charge you a bundle for services and information you can get for free with a lender or a HUD counselor.

  1. Don’t accidentally sign away your title. This may sound like a no-brainer, but there are companies that will claim to be able to halt a foreclosure process if you sign their form, allowing them to act on your behalf. Don’t believe it. The form may actually lead you to sign away your title, effectively making you a renter in your own home. To be safe, don’t sign anything without getting professional advice from an attorney, a financial professional, or a HUD housing counselor.


What if You Miss a House Payment?

After you miss a payment, it may take three to six months before a lender starts the foreclosure process, generally closer to three. By the time you get the first demand for payment, chances are there will already be late fees and penalties added to what you owe. So if it looks like you are not going to be able to make a mortgage payment, don’t hunker down in fear. Contact your lender right away and talk it over. Explain what has happened that made you unable to pay. They may be able to extend you a grace period before they have to add fees and penalties, or take legal action.

The possibility of getting a grace period quickly decreases if you try to ignore the problem. Generally, 30 days after you’ve missed a payment you will be found in default, so don’t wait, contact your lender and stay in touch. By keeping honest communication open, you can get your lenders on your side. Also contact HUD and ask for a housing counselor. A solution still must be found, but by acting fast you are showing good faith.


Options That Can Help You Retain Your Home

Don’t give up too easily. HUD has programs that are not charity, but that can help by refinancing your home, lowering the payments, or reducing the principal. Here are a few:

  • Reduced payments. The details vary, but you may be able to get your mortgage payment lowered to 31% of your gross income. That of course, makes it more likely that you can keep up with the payments.

    Typically this type of modification can result in lowering a payment 40%. HUD reports that among homeowners who do this, 18% see a payment reduction of $1,000 a month or more. This program is called HAMP, or “Home Affordable Modification Program.”
  • Underwater. HUD also has a program known as HARP, which stands for Home Affordable Refinancing Program. This is for homeowners who are underwater on their mortgages, meaning, they owe more than the house is now worth. Ask your HUD counselor about this program.
  • Reducing the principal. Like HARP, this program helps homeowners whose homes are worth less than they owe. It’s called PRA or Principal Reduction Alternative. This may also be available for homeowners who are underwater on their mortgages.

Contact HUD for other options involving refinancing or loan modification. HUD also has assistance programs for homeowners who are unemployed, and “managed exit” programs. Managed exit programs help homeowners transition into more affordable housing.

You may also contact the Federal Housing Administration (FHA) to get answers to question and to help you understand your options.

FHA 1-800-225-5342

Or call the National Servicing Center at 1-877-622-8525. If you are hearing or speech impaired, call 1-800-877-8339.


Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

Meet Teresa