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If I Receive a Foreclosure Notice From My Lender, What Should I Do?
Mistakenly, many homeowners facing foreclosure wait until the 11th hour to try and do something about it in order to avoid the foreclosure. Once in default, the homeowner faces the real possibility of losing his or her home. There are things you can do immediately as soon as you default on your payments. Don't lose your home and damage your credit history if you can help it by allowing the bank to foreclose on your home. Here are the things you should do immediately once the foreclosure process has started:
Call or write your mortgage lender immediately. Do not ignore the letters from your lender. If you are having problems making your payments, contact your lender immediately. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
Stay in your home to make sure you qualify for assistance. If you vacate your home, you may be ineligible for certain government programs designed to help homeowners avoid foreclosure.
Arrange an appointment with a HUD-approved housing counselor to explore your options. They have information on services and programs that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.
If you bought your home with a Veterans Administration (VA) guaranteed loan, call the VA office nearest you.
- Cooperate with the counselor or lender trying to help you.
- Explore every alternative to losing your home.
- Beware of scams.
- Do not sign anything you don't understand. And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.
- Act now. Delaying can't help. If you do nothing, You will lose your home and your good credit rating.
Fortunately, there are a number of things that can be done to avoid home foreclosure. There are different options available if you want to retain your home vs. if you want to dispose of the home.
Options You Have For Reinstating Your Loan and Keeping Your Home
Total Reinstatement: Prior to a foreclosure sale, borrowers have the right to reinstate a delinquent loan. This process involves bringing your loan current in one payment. You will be required to provide a certified check that will include all past due payments, late charges and any fees and costs, which have been assessed to your account. Paying off the reinstatement amount will cancel the foreclosure and enable the homeowner to continue to live in the home as if no default occurred. For many delinquent borrowers, however, reinstatement is not an option because they are deep in debt and cannot make up back payments, plus other expenses. Consult with a real estate attorney or an experienced real estate broker because reinstatement laws vary from state to state.
Repayment Plan: This process involves creating a repayment plan with the lender and making up the amount past (plus penalties and interest) due over a period of months by paying a full payment plus a partial payment on the past due balance each month. You will be required to give your bank a cash contribution equivalent to 30-50% of your total arrears (total of late payments, bank fees and attorney's fees.
Special Forbearance Plan: This option may provide for a temporary reduction or suspension of payments, that will be increased at a later point to repay the delinquent amount over a specified period of time. You may qualify for this if you have recently lost your job or your source of income or if you had an unexpected increase in living expenses. A lender expects that during the moratorium period the borrower can solve the problems be securing a new job, selling the property or finding some other acceptable solution.
You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.
Depending on your lender, you may be able to restructure your loan. For example, delinquent mortgage payments may be added to the back end of the borrower’s scheduled payments or the borrower could be given more time to bring the late payment current. Some mortgage companies are able to arrange a repayment plan based on your current financial situation. You may qualify for this option if you recently lost your job. Call your lender and inquire if you meet the requirements for forbearance.
Renegotiate with the Lender - Mortgage Modification: This option may allow you to refinance the debt and / or extend the term of your existing mortgage loan. Loan modifications reduce a borrower’s monthly payments by decreasing the interest rate, rolling late payments and fees into the principal, or extending the life of the loan. One strategy gaining support by the government but which lenders are slow to support is is to lower the actual principal loan balance.
These strategies make the loan more affordable. Lenders don’t want the property back; they want to keep their loan portfolio full of performing loans — not defaulting loans. Lenders say that the sooner they hear from a delinquent borrower in trouble, the easier it is to negotiate a solution. A loan modification requires the prior approval of the investor.
Find out if your loan is eligible for modification under the federal government HAMP program.
HUD Partial Claim: Federal Housing Authority (FHA) Partial Claim is an interest-free second mortgage through Housing And Development (HUD), to assist the borrower reinstate a first mortgage that is in default. FHA mortgage holders may qualify for a partial claim if their loan payments are more than 4 months, but no more than 12 months, overdue, they have the proven financial stability to begin meeting their payments and they are not currently in foreclosure.
Anyone with a FHA mortgage can apply for HUD's assistance. Under the Partial Claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI [principle, interest, taxes and insurance). When your lender files a Partial claim, HUD will pay your lender the amount necessary to bring your mortgage current. You must execute a promissory note, and a Lien will be placed on your property until the promissory note is paid in full. The promissory note is interest-free and will be due if you sell or leave your property, or when your mortgage matures.
To get more information regarding the HUD Partial Claim program, see the official website.
Refinance: This option may allow you to use the equity that you have established in your home to pay the delinquent amount. Depending on the interest rate of your new loan, your monthly payments might be reduced. You can explore refinancing with your existing Lender as well as with any Lender of your choice.
Find out if your loan is eligible for refinancing under the federal government HARP program.
Options To Dispose Of Your Home:
In situations where you do not want to retain ownership of the home, the following disposition options may be available as an alternative to foreclosure.
Sell The Home: If there is sufficient equity in the property, you may be able to receive more for your property than what is due on the mortgage loan by selling it outright. This option preserves your equity and what’s left of your credit score. Selling also leaves you in a much better financial position should you want to buy another home in the future.
Short Sale: This option may allow you to sell your property for an amount less than what is necessary to pay off your mortgage loan. A short sale will require approval from all lien holders who have an interest in the property (ie. first mortgage holder, second mortgage holder etc).
If you're thinking about doing a short sale to postpone an auction, you should immediately call a short sale agent. Don't wait until you are a few weeks away from an auction to list your home for sale as a short sale. A few weeks might not give your agent enough time to expose your home to the largest number of buyers possible nor to secure an offer for you.
Assumption: With this option, you would sign over the property to another person. That person would then take possession of your home, and take over making the payments.
Deed In Lieu Of Foreclosure: This option may allow you to voluntarily "give back" the property to your Lender without further damaging your credit. Essentially, a deed-in-lieu of foreclosure is a transfer of title from a borrower to the lender, which the lender accepts as full satisfaction of the mortgage debt. In this scenario the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him or her from most or all of the personal debt associated with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would obtain in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.
In most instances, in order to be considered for a deed in lieu of foreclosure the total debt on the property should be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement offer must at least be equal to the fair market value of the property being turned over. Generally (but not always), the lender will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property.
Bankruptcy and Foreclosure
Filing bankruptcy is not a permanent cure for foreclosure, but it can temporarily halt the foreclosure process. Once a borrower in default files a petition for bankruptcy, foreclosure proceedings stop immediately. A homeowner, however, must hire an attorney in order to file bankruptcy, which can be expensive. Before considering this option, a homeowner should consult a real estate attorney. In general, here is what is involved:
File for bankruptcy and seek a “stay“ of the foreclosure.
If you file for personal bankruptcy under Chapter 7 a so-called "automatic stay" is placed on all your creditors, including the foreclosing lender, by the court. HOWEVER, the stay is only a temporary fix to the situation.
Chapter 7 never permanently stops home foreclosure. It only gives you relief from unsecured creditors like credit cards and prevents certain creditors from pursuing collection action against you. It does NOT discharge debts such as taxes, child support, alimony or student loans, nor can it give you relief from other secured creditors — like your lender — whose debt is secured by the home you're living in.
In fact the "automatic stay" is only effective so long as the court wants it to be in place. At any time the court can grant your lender's motion for "relief from the automatic stay." Once the court grants that motion the foreclosure against your home can proceed to conclusion.
One viable exception does exist, however, by filing for a Chapter 13 bankruptcy. Under Chapter 13 you are allowed to sit down with your creditors and arrange a payment plan to pay back what you owe them over a given length of time and usually on a lower payment schedule. Once accepted, the creditors, like your lender, must abide by the terms of the plan.
Call it financial reorganization or a workout plan, any way you look at it Chapter 13 is a good way to save your home from foreclosure, and can indeed stop foreclosure so long as you continue to make the payments agreed to under the plan until all debt owed is totally paid off.
In essence, then, through a Chapter 13 debt reorganization plan you can cure the default and save your home. However, you must realize up front that not everyone qualifies to file for bankruptcy. There are certain threshold qualifications that must be met which were tightened up when the U.S. Bankruptcy Code was revised a few years ago.
How Do I Know if I Qualify for Any of These Alternatives?
A housing counseling agency can help you determine which, if any, of these options may meet your needs. You should also discuss the situation with your lender.
Official HUD website in NC for avoiding foreclosure: http://www.hud.gov/local/nc/homeownership/foreclosure.cfm
NC Foreclosure Help website is: http://www.ncforeclosurehelp.org/
VA Foreclosure Help
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Important: If your loan is through the Veteran’s Administration, please see the following website for more information on VA Foreclosure Alternatives. If you have a VA loan and wish to do a short sale, the VA offers the VA Compromise Sale Program.
When your loan goes into default, your servicer/holder is responsible for contacting you, the mortgagor, to determine the reason for the default and attempt to make arrangements to cure the delinquency. If the problem can’t be resolved by the time you are three payments past due, the servicer/holder is required to notify VA that your loan is in default. After this notice is received, VA will attempt to contact you to discuss your current situation and help you determine the best course of action. They can also help you communicate with your servicer. For detailed information on how to reach a VA Loan Service Representatives, please go to the Contact Me. You should be prepared to discuss:
- The reason you are, or will soon be, in default
- Your current financial/employment situation
- Whether you or someone else occupies the property
- Whether or not you wish to keep the property
Most foreclosures result in losses to everyone involved, the veteran, the servicer/holder, and VA. Many foreclosures can be avoided, particularly when all parties work together.
In addition to all the alternatives listed above for homeowner’s with non-VA loans to avoid foreclosure, those with VA loans can also explore the following with a VA Loan Service Representative:
Payment assistance – many state and local governments, as well as private charitable organizations have programs which will pay all or part of your mortgage obligations for a fixed period of time. VA can provide information on these programs; they do not, however, have a program which would enable VA to give direct payment assistance.
Refunding – VA has the discretionary authority to buy a loan from the holder and take over the service. This is called ‘refunding’. The VA considers this alternative for every loan before foreclosure is completed. If you have the ability to make mortgage payments, or will have the ability to in the future, but your loan holder has decided it cannot extend further forbearance or a repayment plan, you may qualify for refunding. If refunding is appropriate, VA will notify you. |
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What is an SFR?
The complex details involved with short sales and foreclosures are unique calls for specialized expertise. Contact an agent such as myself that has earned the Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors and who is committed to helping you understand your options so you can make the best possible decisions for you and your family.
If you are in a situation where your home is “underwater” due to falling home prices, you are unable to make your current mortgage payments and you are considering pursuing options such as a short sale, deed in lieu of foreclosure, strategic default or even foreclosure, there could be drawbacks that I, as a real estate agent, cannot advise you on. For your protection, I suggest that all borrowers:
- Obtain legal advice from a competent real estate lawyer regarding deficiency judgments
- Call an accountant or CPA to discuss short sale and foreclosure tax ramifications
Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale or foreclosure will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.
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