Homeownership is an important part of the American dream. Granted, some people prefer to rent or live with others, but if you are one of those people who has decided to buy a home, you probably consider anything else less than ideal.
You have worked hard to save for the down payment, and you are proud to be a homeowner. If buying a home is one of life’s successes, losing a home can be one of life’s failures. If you default on most loans, all you are left with is a late fee or a small notation on your credit report.
In the case of a mortgage, however, a seemingly small misjudgment or miscalculation combined with inaction due to embarrassment, indecision or misinformation can result in a large negative on your credit report and score, costing you your home and tens of thousands of dollars.
A mortgage default is reported like most other negative items on your credit report for the usual seven-year period. Future loan underwriters and credit grantors view it as a more serious event because of the size of the obligation and the possible serious consequences to the lender if a mortgage fails.
When lenders look at your credit report, they give special emphasis to how you have performed on similar types of loans. So a car lender pays special attention to car payments, and a mortgage lender looks hard at your mortgage history.
Given the recent meltdown of the subprime mortgage industry and the general tightening of credit it has produced, this chapter is a critical one for any homeowner who is under financial stress. Money, self-esteem, and the very roof over your family’s head are at stake, as is your good credit when a possible foreclosure is looming.
This article gives you the advice you need to prevent foreclosure from becoming a reality, if possible, or to make the best of a bad situation
Table of Contents
What leads up to mortgage foreclosures?
To get a firm grasp on everything related to mortgages and your credit, you first must understand what leads up to mortgage foreclosures. What exactly makes them tick? To start, some basic terminology can help you keep everything in focus. The following people and processes related to mortgages can have an impact on your credit:
- Mortgage broker/banker/lender: The person you worked with to fill out the mortgage paperwork and get your loan closed. This person typically, but not always, sells your loan to an investor.
- Investor: The owner of the loan and the one who makes the rules.
- Insurer: The one who insures the lender/investor in case the loan becomes delinquent.
- Mortgage servicer: The one who is responsible for handling customer service, processing payments, and working with delinquent customers. This person is the one you talk to and the one who knows what can be done and what exceptions can be made.
- Loss mitigation: The process of working with a customer to find a per- manent solution to resolve delinquency. Also known as homeownership preservation.
- Foreclosure: Legal action to force the sale of a home.
So how exactly does a servicer foreclose? The key words to be aware of in the process are quickly and quietly. Unless you speak up, it can all be over in as little as 120 days, depending on your state’s laws.
A lender has a lot of money on the line with your mortgage, and the longer you’re delinquent, the greater the risk is that the lender will lose money on a defaulted loan. Thus, the mortgage lender has a much lower tolerance for your delinquency than, say, a credit card issuer.
Here’s an example: As long as you’re less than 180 days past due on a credit card, it’s not the end of the world.
Generally, you can just pay the minimum due along with a late fee and go on your way. If it’s really your lucky day, you may get the lender to waive the late fee and not report the delinquency. For a mortgage, though, once you’re just 60 days late, you’re well on your way to the edge of a cliff, and you may not even be aware of it.
The key number to avoid in a mortgage delinquency is 90 days late, not 180.
After 90 days, unless you get some help or work out an arrangement, the servicer will generally require that the entire arrearage be paid at once and may not accept partial payments. A 90-day mortgage delinquency on a credit report is very serious. To make matters worse, many people don’t understand when the 90 days are up.
Many mortgages are packaged into large securities and sold to investors. Because the actual lender is often far removed from your community and your home, lenders use a servicer to collect your payments and work out any problems.
The servicers don’t have their own money at risk, so they don’t get too excited about the prospect of delinquency. Unlike the credit-card guys, who have little recourse in a default except to intimidate you into paying, mortgagees speak softly and may not even be heard over all the noise that your other creditors are likely to be creating in a financially stressful situation.
Mortgagees won’t call you at work or at night, and they won’t yell or threaten you over the phone. On the contrary, the tone of their messages, often letters, is concerned, low key, and polite — and then you lose your home.
But if you know where to get help, what to ask for, and what to avoid, this situation can change for the better. Needless to say, it pays to know the rules and what to ask and listen for.
Counting to 90
A major difference between mortgages and credit cards (or other types of consumer loans) is the amount of time you’re allowed to be late. What’s the “magic number”? After you’re 90 days late on a mortgage, unless you take action, the servicer requires you to pay the entire overdue balance at once. If you fail to do so, the servicer proceeds to foreclosure.
Until then, you may be able to make partial payments on your own. If you’re 30 or 60 days late and you make a partial payment, the servicer usually credits your account with the payment. However, if you cross the 90-day mark and then send in overdue payments from a month or two ago instead of the entire amount due, the servicer may send back the money, and the clock keeps ticking.
Furthermore, you may not be aware of the fact that when you’re late on your first payment, your grace period disappears. (A grace period is a period of time specified in your mortgage loan agreement during which default will not occur even though the payment is past due.) The grace period applies only to loans that are up to date, or current. The following example illustrates how this scenario works:
Imagine that your loan papers state your due date as March 1. Assuming that you have a typical two-week grace period, your payment actually has to be in by March 15. If you don’t submit your payment by March 15, you miss that window of opportunity and lose your grace period.
Your April payment is now due April 1. April 15 is no longer an option. In other words, you have no more grace period in April. If you pay April’s payment on or before April 1, you get your grace period back for May and thereafter, as long as your payments stay on time.
If you lose your grace period, the company that services your loan starts counting the number of days you are late from the first of the month, not the 15th. So if you don’t send in a payment on March 15, April 1, or May 1, then on May 2, you need to catch up all the payments for March 1, April 1, and May 1, plus any fees and penalties (which can be hundreds of dollars or more), all at once.
This total is a huge amount for someone in financial difficulties. If you don’t, then on May 2, the formal foreclosure process can start, and you may incur fees for collection costs, attorneys, title searches, filings, and more. When the foreclosure process begins — and it’s up to the investor when it actually kicks in — the loan servicer can then ask for the entire balance of the loan (a loan “acceleration”), not just the late part, to stop the foreclosure.
Where to turn for help?
If you’re having trouble making your mortgage payment on time, time is of the essence. Getting your mortgage issue resolved fast is critical. Remember, the mortgage company doesn’t want your house; it just wants to keep your loan performing — that is, up to date or current. Following are a few ideas on where to turn for help (along with some tips on where not to turn). The essential point is to not wait, but take action.
You can work directly with your servicer, but your loan servicer may offer you only what he or she thinks is the easiest solution, not the one you need, because your loan servicer doesn’t know your situation in detail. We strongly recommend that you use a third-party intermediary approved by HUD. They come cheap, know what to ask for, and can help guide you through what can seem an insurmountable problem.
Your mortgage-servicing company
When you can’t pay your mortgage on time, you can directly contact your mortgage company. Look at it as though you’re trying to solve two problems — yours and theirs. Ask to speak with the loss-mitigation department, also referred to as the workout department or the homeownership retention department.
This area is able to do more for the consumer and deals with complex issues better than the standard collection department, which usually offers only to make catch-up payment arrangements. You can find the contact information for your servicer in your loan documents, on your monthly statement, or in correspondence you receive from the company.
When you call, get names and extension numbers so you can try to keep a single point of contact and continuity. Doing so may not be possible, but knowing whom you talked to when you talked, and what you agreed to is important.
To keep the call simple, we suggest you do some homework before you call: Know what will be necessary and for how long to remedy your situation. Write out what happened, what changed, what you need, and how to contact you or your counselor, if you’re working with one.
These notes will help keep you from rambling and get you to the solutions faster. Then ask for what you need — and also ask what other options may be available beyond the one offered to you.
Other available help
A number of housing counseling agencies are also available to help you work out a solution. We strongly recommend that you use one of these agencies to help you work out a deal with the servicers. These agencies work with people in similar situations every day, so they know what to ask for and will take the time to understand what you really need.
Although the contact information may change over time and new players are continually offering this service, you can look for resources through HUD’s website at www.hud.gov, or contact Neighborworks’ Project HOPE at 888-995-HOPE or www.nw.org. We suggest that you call before you email or visit an office for the quickest service. You may also contact the National Foundation for Credit Counseling at www.housinghelpnow.org or 866-557-2227. Many credit counselors are also HUD-certified housing counselors.
As you look for answers and help, keep in mind that not everyone out there has the same objectives that you do. Some are trying to help only themselves. Proceed with caution and consider the following tips as you evaluate any prospective source of help:
- Don’t panic.
- Find out whether you’re dealing with a nonprofit organization.
- Don’t make payments to anyone other than your servicer or his or her designee.
- Be wary of any organization other than your servicer that contacts you to help.
- Never sign a contract under pressure.
- Never sign away ownership of your property.
- Don’t sign anything with blank lines or spaces.
- If English isn’t your first language, and a translator isn’t provided, use your own translator.
- Get a second opinion from a person or an organization you know and trust.
If you’re having trouble paying your mortgage, a predatory lender or foreclosure scam artist may try to get you to take out a high-risk second mortgage on your property. If these marauders come a-calling, run the other way — fast! These lenders are dangerous because they charge high fees you can ill afford to pay, and they distract you from real solutions by wasting critical time that you could otherwise spend solving your problem.
If you receive an offer saying you’ve been preapproved for a loan, it means you’ve been pre approved only for the offer, not the actual loan. Don’t waste too much time chasing pre approved offers.
Other red flags to watch for include the following:
- Phantom help: This company wants to “help” charge you high fees for work you can do yourself, charge you for legal representation that never materializes, or offer you a loan even though you don’t have the income to repay it.
- Bailout: Various schemes may try to get you to surrender your title to the house, thinking you’ll be able to remain as a renter and buy back the house.
- Equity stripping: A buyer purchases your home for the amount of the arrearage and flips the home for a quick profit, pocketing the equity in your home that otherwise would have been yours.
How To Avoid a Notice of Default
If you’re having trouble making your mortgage payments, you’re not alone. You also may have some options to avoid the expense and upset of going through a foreclosure. Even if you can’t or don’t want to keep your house, you can lessen the damage to yourself, your family, and your credit by taking positive action. You can take control of your situation and turn this ship around before it sinks.
Before you take any action, assess your situation as dispassionately as you can. If stress and anxiety make that impossible, we suggest you get a third-party professional such as a nonprofit HUD agency or an attorney to help you do so. Your situation may not be as bad as you think, or it may be worse. What’s important is to know for sure where you stand. For instance:
- Will the problem that has caused your mortgage delinquency be corrected soon? Is it just a short-term event?
- If it’s a longer-term event, how much extra time will you need to get back on track financially?
- Is the event long-term enough to reconsider whether you can stand the stress until it’s resolved and stay in your home?
- Is your situation serious enough that you want to get out of your home-ownership obligation?
To help you find the answers to these questions, you need what’s called loss mitigation counseling help. Loss mitigation counseling is to help develop a solution that will allow you to catch up on your payments, modify your loan terms, or otherwise rectify your situation so you can afford to keep your home or lessen the damage caused by a foreclosure.
Below are some of the solutions:
1. Find a good credit counseling agency
This suggestion has nothing to do with credit counseling; it focuses on getting you an objective assessment of your overall financial picture and whether you can realistically afford your mortgage payments.
The counselor can help you build a revised budget that may free up cash for your mortgage, and an expert opinion can help to prioritize your debts and expenses. Many agencies are also HUD-certified and can work with your servicer to get a solution that works for your situation.
2. Ask about mortgage-repayment plans
These plans entail the servicer setting up a structured payment plan (sometimes called a special forbearance plan) that will get the mortgage back on track in three to six months. Sometimes this deal can be a verbal agreement with your exist- ing lender. If it is, we suggest that you document the terms in a letter and send it to the lender so you’re both clear on the terms of what you’re doing. Typically during a repayment plan period, full monthly mortgage payments are made along with a portion of the past-due payments until the mortgage loan is back to “current payment” status. The sooner you get a plan in place the less damage you’ll incur on your credit report.
3. Check the HUD website at www.hud.gov for resources and help
Don’t forget to talk to your lender about your need for assistance — and do it soon. Some servicers have programs only for borrowers who are not yet delinquent and other programs for borrowers who already are. For the greatest number of options, get started as soon as you know you have a problem making mortgage payments as agreed, and be sure to ask for all the options they have for you.
4. Ask for mortgage loan forbearance or loan modifications
For problems that will take longer than three to six months to remedy, you can ask for mortgage loan forbearance or loan modifications.
A forbearance temporarily modifies or eliminates payments that are made up at the end of the forbearance period. A forbearance is useful if you have a sale pending or you expect a windfall, but you can’t afford the payments at present. It also prevents your credit from being damaged by a string of late payments.
A loan modification changes the terms of the original mortgage permanently in a way that addresses your specific needs. The modification may change one or more terms of the original mortgage agreement, such as adding delinquent payments and other costs to the loan balance, changing interest rates, or recalculating the loan. If this process seems intimidating, use a HUD agency to deal with the servicer and offer solutions on your behalf. Clear communication is key here.
These modifications need to be in writing, and both the servicer and the borrower must approve them because they’re long-term and large in scope. You can expect goodwill to go only so far, so don’t be surprised if the servicer asks for a fee of around 1 percent to cover the costs of processing a loan modification. After all, servicers always have an appetite for some immediate income for their banks or companies.
If you were delinquent on your loan before the modification, expect your credit history to show the prior delinquency. Mortgagees are very reluctant to change your credit history, but a modification and efforts to bring the mortgage current should show up on your credit report.
If you are also carrying credit-card debt, being late on your mortgage or having a loan modification on your credit report may set you up for a hike in your interest rates under universal default rules. Review the default provisions of the credit cards that you use to carry a balance and consider closing those accounts that have universal default provisions before they raise your rates.
After the accounts are closed, your rates should stay the same during your repayment period. The small damage to your credit score from closing accounts will be a bargain compared to what can happen if you can’t handle interest rates that may go to 30 percent or more.
If you’ve had the cards for more than ten years, consider keeping them open if you can transfer the balances to cards without the universal default provision; these long-history cards count for more on your score than ones you’ve had for a shorter period of time.
How To Avoid a Foreclosure After You Receive Notice
Some problems take longer to resolve than anyone wants them to, and some can be resolved only by taking a step or two backward before making any progress. Even when you can’t solve your problem or just can’t stand it anymore, you still want to stay in control of the process.
Doing so can lessen damage and expenses and keep your dignity — and maybe your sanity — intact.
Following are some of the many options available. And don’t forget that you may have newer options as well.
1. Sell your home
You may be able to sell your home in a short sale if you have no equity left, or in a pre-foreclosure sale if the value of the house still exceeds the remainder of the mortgage.
Short sale: In a short sale, you ask your lender for permission to sell your home for less than the mortgage value, and the lender uses a real estate agent to sell the home. The lender may allow a sale for an amount lower than the total debt. A short sale is generally cheaper for the bank and less stressful for the homeowner than a foreclosure. Because this solution is good for the investor, you can negotiate a bit. Ask that the loan deficiency be reported to the credit bureau as a zero balance instead of a charge-off.
Congress has passed a law called the Mortgage Forgiveness Debt Relief Act that affects how a principal residence foreclosure is handled for tax purposes. It exempts up to $2 million of forgiven mortgage debt, subject to certain conditions, from federal taxes. Normally, you would have to pay income tax on that amount. We suggest that you check to see whether you have state taxes due, because they aren’t covered in this federal law.
Pre-foreclosure sale: A pre-foreclosure sale arrangement allows you to defer mortgage payments that you can’t afford while you sell your house. This solution also keeps late payments off your credit report.
2. Deed-in-lieu of property sale or foreclosure
This option is becoming more popular. It requires listing your home with a real estate agent. If the home can’t be sold, you sign over the home’s title to the lender and move out. Usually, to qualify for this option, you can’t have a second mortgage, an equity loan, or another lien on the property.
3. Consider Bankruptcy
Depending on your specific situation, Chapter 13 bankruptcy might be a good option, and a bankruptcy attorney can help you determine whether this is the best option for you.
After a certain period of time, you no longer owe the debts in this form of bankruptcy, which consolidates your debts into a fixed payment plan.
A filing for bankruptcy can stop foreclosure proceedings, which can allow you to stay in your home while you figure out how to proceed financially. Although bankruptcy remains on your credit report for up to 10 years, it has a very severe impact on your credit moving forward.
How To Handle a foreclosure if one has started
Even if you’ve gone down the delinquency path and are in the legal process of being foreclosed upon, you may still be able to talk to the servicer to try to work things out or buy yourself more time to come up with a solution or make a more dignified exit from the home. But once again, time is not your friend here, so don’t wait!
- Get a HUD-approved counselor involved and review loss-mitigation options with your servicer. Most want to help.
- Contact and keep contacting the servicer’s loss-mitigation staff until you get a solution you can live with. If they don’t offer workable suggestions, ask to speak to managers and vice presidents or higher. Now is no time to stand on protocol or accept “I’m sorry” for an answer.
- See an attorney. Ask for options. Review all the mortgage documents to be sure they were properly drawn and executed. The technical phase used here is “Truth in Lending Compliance.” Ask about bankruptcy options and timing so you know all options available to you.
If none of these options works, you will go through the full foreclosure pro- cess. In short, the house will go to auction and be sold. The new owner will give you appropriate notice to leave the house, per your state statute. A notice may be placed on your front door detailing the terms.
How To Deal With Deficiencies
When all is said and done, you may still owe some money. If your home sells for less than the amount still owed on the mortgage and fees, you may have what is called a deficiency balance. For example, say a borrower borrows $500,000 from a lender to purchase a home, but the borrower falls behind in payments and the bank forecloses. The home is ultimately sold for $400,000. The $100,000 that the lender lost on the deal is called a deficiency.
Current practice is to forgive this amount. At one time this wasn’t always the case, and the situation may change again in the future. The most important point is to realize that your problems may not be over when you leave the home. You may need to deal with the IRS if you don’t qualify for mortgage debt forgive- ness under their rules.
The following are some potential (and we stress potential) deficiencies you may face and what you can do to deal with them:
1. The lender asks for a note
Doing so is not a current practice, but be aware of it for the future. This note isn’t the kind your mother wrote to school. This note is a promise to pay an unsecured amount to cover the mortgage deficiency after the sale.
As with any loan, it has terms, interest rates, and payments due on certain dates. Many of these terms can be discussed before the sale takes place and may be modified to fit your situation. Use a lawyer if anyone suggests this solution to you.
2. The lender sends a demand letter
As in asking for a note, this practice is not a current one. A lender may send a demand for payment of any deficiency following the sale of a home.
Lenders use a demand letter if they don’t want to give you an unsecured loan for the balance due. In essence, the problem is all yours, and you need to work out a way to pay the balance. Here again, if this scenario ever happens to you, get an attorney to advise you.
3. The lender forgives the debt
This is a current practice, but it can always change. The lender chooses to forgive the debt instead of pursue it. This practice is nice as far as it goes, but be prepared for the IRS to count the forgiven portion of the debt as income through the issue of a 1099 form.
Forms 1099 A and C, which are normally used to document unreported income, are used to report forgiven debt. The amount of the forgiven debt becomes taxable income in most cases, unless you’re covered by the Mortgage Forgiveness Debt Relief Act.
If you’re among the IRS’s unforgiven and you get a 1099, and it is for a lot of money, we suggest that you see an attorney ASAP for legal options. Remember, the mortgage debt forgiveness law is federal and may not forgive state tax obligations.
The state you live in makes mortgages nonrecourse. If you live in certain states, you may get a break relating to personal mortgage deficiencies. Some states have passed laws saying that you are not responsible for any mortgage deficiencies.
Some effectively make the mortgage a non-recourse loan. (Nonrecourse means the lender has no recourse to collecting money due other than the security on the loan.) You may not be personally liable. This protection may not apply to refinancing. See an attorney to find out whether it applies to you.
Subject to additions or deletions, the list of states that have passed some anti-deficiency protection legislation offering at least some protection for borrowers includes Alaska, Arizona, California, Minnesota, Montana, North Dakota, Oregon, Texas, and Washington.
The IRS wants more taxes
Even though a loan may be uncollectable or forgiven, it is not beyond the reach of the IRS. You see, the lender gets to take a loss on its taxes for the bad loan. Not wanting to miss a tax opportunity, the IRS considers the lender’s loss to be your gain.
So you may owe taxes on the deficiency amount if you don’t qualify for relief under the Mortgage Forgiveness Debt Relief Act. This law is scheduled to run only until 2010. This amount can be a very big number indeed.
A foreclosed borrower faced with a sizable 1099 still has hope. If you file IRS Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness,” and you are insolvent at the time of the forgiven debt, the IRS may forgive the liability. Again, see your attorney for the details.
Even though missing mortgage payments can be overwhelming, you can view your lender as a partner in helping you avoid foreclosure by remembering that they want you to get back on track.
In reality, you may not be able to avoid foreclosure under certain circumstances, but you should still talk to your lender as soon as you notice signs of trouble paying your mortgage. If you start the conversation early, you’ll have more options, such as a payment extension, a loan modification or time to sell the home.