Protecting Yourself from Foreclosure
by Emily Appel
It’s tempting: a mortgage that allows you to buy a nicer house with a lower monthly payment than you expected you could afford, and the interest rate seems pretty reasonable. It may go up or down based on the economy, but that’s years away so you don’t have to worry about that right now, right?
Wrong! What I just described is called an Adjustable Rate Mortgage (or ARM), and it’s causing a lot of people a lot of grief these days. While ARMs are a good choice for some people, they may not be a good choice for everyone. The low interest rate and low monthly payments are only temporary – they’re called ‘adjustable’ because in the mortgage agreement, the lender reserved the right to change the interest rate and monthly payments down the road, based on what the market’s doing. If interest rates in general have gone up, so could yours – anywhere from ¼ to ½ percent all the way to 3 to 4 percent. This translates to higher monthly payments, which you may not have budgeted for and may not be able to meet.
Of course, other circumstances could cause someone to be unable to meet their monthly mortgage payment – loss of a job, hospital bills from a sickness or an accident, or some other emergency that throws your finances out of order.
Mortgage payments aren’t like credit cards, where you can make a minimum payment one month, agree to take finance charges, and just have a bigger bill the next month. Even a first missed (or late) payment can be reported to the credit bureaus – often with devastating effect on your credit score. Each late payment reported after that will further decrease your score, and the lender may tack on late payment fees.
What’s worse, after three or more missed payments, the lender can file a “notice of default” – a legal document warning that unless you get caught up with your payments, they’ll go forward with the foreclosure process and put your house up for sale.
This is a place you really don’t want to get to. After the notice is filed, the mortgage company is less willing to work out an alternative payment plan, and even if you find a way to pay back all that you owed, they may demand that you refinance with another lender, and now that your credit score has taken a beating from the missed payments and notice of default, you certainly won’t be getting a better rate.
So if you’ve started down the road to foreclosure, what can you do to get back on track?
First off, figure out what changed in your personal or family finances that kept you from making your mortgage payments on time. Was it a temporary, one-time set-back, or will it be a permanent change in your finances? Take another look at your budget, and decide where homeownership fits in your priorities now. It hurts, but the best option may be to sell your house to avoid going through foreclosure and instead allow you to focus on finding a home that’s more realistic for your current situation.
Know that you have the power to negotiate with your mortgage lender, to adjust the terms of the mortgage or create a payment plan to make it more manageable for you. It’s in their best interest to work with you – they will make more money if everything works out than if they have to go through the legal process of foreclosure. The lender can temporarily reduce your monthly payments or set up short-term repayment plans to help you make up the deficit.
You have to be proactive about this – mortgage companies are much more likely to negotiate with borrowers who keep in touch and address their situation instead of ignoring the missed payment letters. Plus, the sooner you can work out a solution with your lender, the less potential damage to your credit score.
The good news is that you don’t have to go through all this alone. Homeowner's HOPE™, a counseling service provided by the Homeownership Preservation Foundation can help you make a plan and contact the mortgage company. It’s a free call (1-888-995-4673) where you talk to a real person who will work with you to figure out a plan of action to avoid foreclosure. The staff are trained counselors who will listen to your situation non-judgmentally and coach you to negotiate successfully. They know the ins and outs of the mortgage world, and can share new solutions that you may not have thought of yet. They’ll work with you no matter what type of mortgage you have, and regardless of whether the hurdles keeping you from making your mortgage payments are long-term or temporary ones.
