Faced with the possibility of losing your home, panic is an understandable -- and common -- reaction. Denial is another. Unfortunately, neither of those reactions will save your home nor will they mitigate the damage to your credit rating and future ability to purchase a home.
If you are facing foreclosure, there are several steps you should take to a) keep your home, and/or b) minimize damage to your credit rating and future ability to buy a home.
This article will offer suggestions on what to do if you are facing foreclosure.
Step 1: Stop feeling ashamed. You're not alone. You are not the only homeowner facing foreclosure today. In fact, in December, 2007, 40% of all home sales closed in the Greater Grand Rapids area were foreclosures or short sales (home sales where banks negotiated the amount owed in order to minimize their losses.)
The truth is, lenders contributed enormously to the foreclosure debacle we are experiencing today. In case you missed it last evening, CBS News 60 Minutes broadcast an excellent review of the economic impact sub-prime mortgages have had on today's U.S and worldwide economy. If you'd like to watch the video, click on:
http://www.cbsnews.com/sections/60minutes/main3415.shtml
and click on "House of Cards" video.
One example cited in the 60 Minutes' article involved a couple whose payment ballooned from $2,500 per month to $4,200 per month! No wonder homeowners are in trouble.
Keep this in mind: Unlike 5 years, ago, lenders today are recognizing how deep and widespread the foreclosure problem is and they are more willing than ever before to work with homeowners to avoid foreclosure.
Step 2: Determine whether your deficit is short-term or long-term. Are you struggling because of a temporary job layoff or medical problem, or is it more long-term, like a permanent pay cut, job loss or divorce? Be realistic. It will help you establish the correct plan of action later. If you determine it is temporary, try to estimate how long it will take you to get back on track.
Step 3: Review your assets and liabilities. Do you have any savings you can access? Do you have a 401K you can borrow against or a whole-life insurance policy? If you paid off some or most of your credit card balances with those hidden assets, would you be able to make your house payment? Do you have assets you can sell -- recreational vehicles, boats, snowmobiles, guns, jet skis, motorcycles, big-screen TV's?
Step 4: Ask for help. Asking friends or family for money isn't easy but ask yourself this: If they needed your help and you could give it, would you? Now is as necessary a time as any to put pride aside and ask for help if you need it.
Step 5: Consult an attorney. The only reason this step is not Number 1 is that most attorneys will want to know the information you have collected in the steps above. It will save you money to go to an attorney with some legwork already done.
I must emphasize how important an attorney's guidance is in the foreclosure process. Unless Uncle Harry passed the bar, he is not an attorney. I am not an attorney. Most Realtors are not attorneys. Only attorney are attorneys, and right now, you need one.
It is absolutely critical that you know what your rights and responsibilities are during the foreclosure process. Follow your attorney's advice. What I offer in this article are suggestions, but whatever you do, heed your attorney's advice.
Step 6: Establish a Plan of Action. Once you know your resources, the expected duration of your situation and your legal rights and responsibilities, determine your plan of action. Are you going to attempt to stay in the home and get back on track or simply turn the keys over to the bank?
Before you finalize your plan, though, talk with your lender.
Step 7: Call your lender sooner than later. If you call your lender within the first month or two of missing a payment, they will be much more receptive to working with you than if you call a week before the sheriff's sale.
Ask to meet in person, if possible. If that's not possible, ask to speak to someone in their Loss Mitigation Department.
Explain your situation, including how long you expect the situation to last. If the problem stems from temporary unemployment, for example, you will find many lenders will work with you to get back on track. You may reach an agreement to skip a payment or two, reduce the payment to interest only, negotiate a lower interest rate, etc. Your lender may also agree to a "short sale," which is when a lender agrees to accept less than the full amount owed on the mortgage in order to minimize its expense of going through the foreclosure process.
Step 8: Try to sell your home on a short sale. Before you attempt this, know what your lender is willing to accept and get it in writing.
Too often, lenders make sellers play "Pin the Tail on the Donkey" with short sales, trying to find a target with a blindfold on. "Bring us an offer and we'll consider it," they will say, but months after providing them an offer, they're still "considering it." All the while, the foreclosure process is proceeding.
If you choose this option, be sure you find experienced, knowledgeable help. You need a Realtor who is familiar with the short-sale process and a good real estate attorney.
Step 9: Know when to throw in the towel. Let's face it. If you have no resources left, you see no end to your financial dilemma in sight and you cannot work out any arrangements with your bank, you must accept you will be facing foreclosure. Even so, you still have choices to make about how to handle it:
1. Remain co-operative but don't be bullied. Banks' loss mitigation departments are accustomed to angry homeowners so lashing out at them will do no good. Likewise, don't allow the lenders to bully you into any actions that are not in your best interest. Refer them to your attorney and simply say, "I appreciate your position and thank you for your call." Then hang up.
2. Keep the property maintained. If a lender sees its collateral being abused or abandoned, it may choose to accelerate the foreclosure process to protect its investment. Keeping the home maintained is in your interest, too. It will reduce repairs required to sell the home on the foreclosure market and thus minimize your potential additional liability.
Step 10: Don't be a sucker for "Rescue Schemes." Rescue schemes take various shapes but one of the most common is this: An investor offers to help you "save your home" by purchasing it on a land contract and leasing it back to you until you can re-purchase it. The investor is going to cover your mortgage for a year (or two) until you get back on your feet and then you can buy the home back (at an inflated price, of course.) You may pay a lower payment during that time but the investor is adding the difference to the balance you owe, raising the purchase price when you buy it back.
There are several flaws in this ointment:
1. Often, the investor does not make the payments to the bank as promised and you lose the house by foreclosure anyway. Instead, the investor pockets the money you've paid and your past-due mortgage payments are never caught up. Simply put, this scheme is fraud and if it has happened to you, call an attorney or the prosecutor's office.
2. Virtually all mortgages today have "Due-on-Sale" clauses. When you purchased your home and signed the mortgage, you agreed that when you sold the home you would pay off the underlying mortgage. That includes selling it on a land contract to an investor. Once your lender gets wind that you've sold the home but not paid them their money, they will demand the full balance immediately. Since neither you nor the investor have that kind of cash on hand, the lender can take the property.
3. The new purchase price will be inflated beyond appraisable value. Let's pretend that you weather your financial storm, the investor actually does make the payments and your bank doesn't find out you sold it. It is now two years later. The additional expense the investor has added to the cost of the home in deferred payments and high-risk interest rates will have added at least 10% to the price of the home. In today's economy, real estate values are going down, not up, and especially not up 10%. Two years down the road, the home will not appraise at a value that your investor is willing to sell it back to you and you will wind up losing the home anyway.
If you consider, even for a moment, to get involved in a rescue scheme, do not pass GO, do not collect $200. Call your attorney immediately and make sure he or she reviews and approves every single word in any document you sign.
Foreclosure is one of the most stressful situations we can experience in life. But it can signal a new beginning. It depends on the way you choose to see it.
I you find yourself in a short-sale situation, call me. I'd be happy to help.
Don Phelan
RE/MAX of Grand Rapids, Inc.
616.791.0110 ext. 2121
616.648.0800 (cell)
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