Homeowners may find themselves at the crossroads of financial risks. An unexpected illness or medical problem may arise, a job layoff, poor financial management, liens against your property, or just taking on more debt than you can manage can put you at risk of:
Q: What happens when I miss my mortgage payments?
Q: What should I do?
Q: What are my alternatives?
Q: What happens when I miss my mortgage payments?
A: If your payment is a few days late, you are delinquent on your loan. Most lenders allow a payment to be made without late fees if the payment is made within 15 days after the payment is due. If your mortgage payment is in default, 30 or more days late, then the lender has the right to begin foreclosure proceedings. The lender's rights are written in your mortgage note. It is important to read the terms of your mortgage loan and contact your lender immediately should you default on your loan. You should remember that any late payments will be negatively reflected in your credit report.
Should foreclosure occur, you must move out of your home. If your property value is less than the total amount you owe on your mortgage loan, the lender may charge you with a deficiency judgment. If this were to happen, you then would lose your home and owe the bank or HUD (if you have an FHA loan) an additional amount of money to cover the deficiency.
Q: What should I do?
A: If you have received letters from your lender, DO NOT IGNORE THEM. If you have recently been laid off from your place of employment or had any event that will cause sudden reduction of income that will directly affect your ability to pay your mortgage, you should contact your lender immediately. Call and write to your lender's Loss Mitigation Department and explain your situation. Make sure you are prepared to discuss your household's monthly budget. Your financial information of income and expenses are important for your lender to assist you through this crisis.
It is also important that you stay in your home in order to qualify for the various assistance programs that may be available to you. If you abandon your home you may not qualify for these programs.
You may contact AHAA's Home Retention Program and speak to a counselor. We will help you approach your mortgage company to discuss foreclosure alternatives and reinstatement options. For more information, contact us at 1-866-716-3630.
You may also contact HUD for a housing counseling agency nearest you at 1-800-569-4287 or TDD 1-800-877-8339. These agencies provide valuable resource information on government agency services and programs as well as private and community organizations that are available to assist you. These services are usually provided free of charge.
You may need to contact a professional credit counselor -a trained expert who can help you manage your money and work with you to form a debt management plan. This professional is trained to analyze your financial situation and provide recommendations that you may not see because you are emotionally involved. These counselors are emotionally detached from your situation and can better evaluate the situation. They can bring things into perspective to help you alleviate the stress and burden of the debt.
There are two types of counselors to help you through this crisis:
- Credit counselors- trained in money management and financial planning.
- Housing counselors- help homeowners resolve default on their mortgage loans and other mortgage problems.
Q: What are my alternatives?
A: There are several options for you to be aware of:
- Work out an agreement with your lender to prevent foreclosure.
- Discuss a debt repayment plan to resolve future and past due payments/arrears (debts that are overdue). You agree to make monthly mortgage payments when they are due, along with a partial monthly payment on the arrears. Or you may request for a temporary interest rate or payment reduction from your lender or loan servicer.
- Loss Mitigation Tools
You should discuss the benefits of using the following types of loss mitigation tools with your lender:
Mortgage Modification
Partial Claim
Partial Release
Special Forbearance
Capitalization
Pre-Foreclosure Sale (PFS)
Compromise Offer
Assumption
- Mortgage Modification - this would change one or more of the original terms of the original loan to bring a defaulted loan current and avoid foreclosure. A modification can cure the default by capitalizing the arrearage and/or reduce the monthly payment to an amount which is more affordable for you. This is also called recasting.
- Partial Claim - if you have a FHA loan, your lender may be able to help you obtain a payment from the FHA-Insurance fund to bring your mortgage up to date. This is a one-time payment!
You may qualify if:
- your loan is at least 4 months late but no more than 12 months in default.
- you are able to begin making full mortgage payments.
- the mortgage is not in foreclosure.
When your lender files for a Partial Claim the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage up to date. 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 is due when you pay off the first mortgage or when you sell the property.
- Partial Release - you could request your lender to release a portion of the mortgaged property for the mortgage after part of the loan has been repaid.
- Special Forbearance - your lender may be able to delay foreclosure or other legal action based upon an agreed to repayment plan. Essentially, you are required to make all mortgage payments as scheduled and you promise to pay the arrearage or debt by a specific date. This is determined based on your financial situation and may even provide for a temporary reduction or suspension of your payments to allow you time to recover from a financial hardship. This alternative may be available to you if you have recently experienced a reduction in income or an increase in your living expenses. You will have to provide your lender with information that would verify that you are able to meet your new repayment plan.
- Capitalization - this is when you apply your delinquent amounts to the outstanding principal balance of your mortgage.
- Pre-Foreclosure Sale (PFS) - this is sometimes called a short sale. This process allows you to sell your property for less than the amount owed in order to avoid foreclosure.
- Compromise Offer - If you have a Veteran Administration (VA) insured loan it will allow a Veterans Administration pre-foreclosure sale. A compromise agreement allows the VA to pay the lender or servicer the difference between the sale proceeds and the mortgage balance, but not in excess of the original guarantee on the loan.
- Assumption - allows you to transfer your existing mortgage to a third party buyer. This typically requires the buyer to purchase your equity and obligations to your property. The buyer takes over (or assumes) the defaulted mortgage and thereby the expense of foreclosure. The advantage may be that the assuming party is in a better position to deal with the default. You need to make sure the loan documents allow you to transfer the loan.