Foreclosure rates have been skyrocketing across the country over the last year and a half. Although the reasons for foreclosure are varied, the most common reason is the type of loan on the property. Many homeowners made a bad financial decision and choose to take an Arm loan (adjustable rate mortgages) instead of a traditional 30 year fixed rate mortgage. The initial interest rates on these loans are lower than a standard mortgage for the first few years, after which the interest rate skyrockets. Monthly payments of $1,200 quickly jump to $1,600 or more in a matter of months. Of course, some homeowners had planned on refinancing their homes before the mortgage ever adjusted. Unfortunately, for many homeowners the market took a downward turn and they found themselves unable to get new financing because their homes were worth less than the original purchase price. Investors and regular homeowners alike could simply not longer afford to make their monthly mortgage payments. While the most common reason for foreclosure, it isn’t the only one. Other reasons causing foreclosure proceedings include loss of employment, divorce and health issues resulting in loss of income or large medical expenses.
Foreclosure rates have reached epidemic proportions in some states. Many homeowners don’t know where to turn or what to do when they start falling behind on their mortgage and most realize there are alternatives available. For this reason, some states have set up free resources to help homeowners who are facing foreclosure. There are also several non-profit groups that will offer free help to homeowners. Homeowners should be wary of any individual or company that charges a fee to help them. Typically they are charging for something that could be gained without charge.
Stopping Foreclosure
There are ways to stop foreclosure proceedings and save your home. It takes a lot of work, persistence and some sacrifices. Depending on your circumstances, your mortgage company may be willing to work with you to avoid foreclosing on your home. For example, if you suddenly lost your job but have good prospects on getting gainful employment in a relatively short time period, your mortgage company may decide to allow you to make up the payments over a period of months by adding in an additional payment to catch up on the payments you missed. There are other options as well, like forbearance. While not a common occurrence, it can be done. In essence your mortgage holder agrees to reduce or even suspend the monthly payments for an agreed on amount of time. The agreement is formal, usually done in writing. After the time period has expired, you would resume making the normal monthly mortgage payments and an additional payment to catch up the loan until it is current. In cases where the homeowner can’t afford the payment but could make a smaller one, the mortgage holder may opt to modify the terms of the loan. While extremely rare, the mortgage holder can opt to reduce the interest rate of the mortgage or convert it to another type of loan with a more affordable payment. Of course, there are many, many factors that the mortgage company has to take into consideration before doing something as radical as a modifying the loan. A lot depends on the mortgage company itself, some are definitely more consumer friendly that others. The biggest considerations will be the amount of equity (if any) in the property along with the ability of the homeowner to make the payments on the new loan. There will also be other mitigating circumstances that may effect the mortgage company’s decision to grant a modification.
Selling the Home before Foreclosure
There is a last ditch effort to avoid foreclosure if there is simply no way you can afford the mortgage payments any longer—selling the property through a short sale. What is a short sale? In essence a short sale is where the property owner owes more than the current market value of the property and sells the property before it is foreclosed on with the permission and approval of the mortgage holder. Short sales have popped up all over the country, especially in California, Arizona and Nevada (the Las Vegas and Phoenix real estate markets have been particularly hard hit). There are some road blocks to a short sale. Before the property can even be put up for sale, the short sale must be approved by the mortgage company. Consequently, any offers made on the home must also be approved by the bank before the house can be sold, which is why it is extremely important that property owner use an agent that specializes in short sales (with documentation to back it up). Short sales are a lot more complicated and typically take several weeks longer to complete than a regular home sale. There are some catches. Depending on the homeowner’s state legislation, even after the property has been sold they may be liable for the difference.
Things you need to do
If you are running behind on your payments, the most important thing to do is to talk to your mortgage company. Don’t wait until you are almost 90 days past due to talk to them. With the state of the housing market across the country, most mortgage companies are scrambling. With so many foreclosures taking place, companies are more likely to try to avoid foreclosing on a property if possible. Talk to your mortgage company and be honest with them. Document your discussions and get all agreements in writing. Also, be wary of any individuals or companies that wish to help you for a fee. There are lots of free resources out there. Some states have setup foreclosure help hotlines and there are several non-profit organizations out there that can help distressed homeowners. Foreclosure scams are on the rise and scammers are targeting distressed properties. Be cautious and smart, thoroughly check out anyone that is offering to help you and don’t be afraid to seek legal counsel.
Real Estate 101 - Avoiding Foreclosure
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