A home purchase is the largest investment most people will make in their lifetimes. We save for years to accumulate a down payment to purchase our first home. We work hard to keep a stable job and income to ensure our mortgage payments are made on time every month. The loan commitment can be 20, 30, 40 or now even 50 years, so its payment can actually cross generations.
Our emotional attachments to our home can be as great as our financial ones. We raise our children there. We entertain our friends. We enjoy intimate times with our loved ones. It is our solace from the hectic pace of the world. So, when life deals us a particularly difficult and often unexpected blow such as a divorce, a job loss or transfer, a business failure, a death in the family, a major illness or something similar, it can shake our financial and emotional foundations to the core. The ownership of our homes can be at risk and falling behind in payments, even through events beyond our control, can place us at risk for losing our home and our credit records can be destroyed.
If the delinquency in payments becomes too severe, the lender may foreclose. A foreclosure means that the property will be repossessed by the lending institution that provided the mortgage. In addition to losing the possession of the home, it is likely the owner could even lose all of the equity they have accumulated after years of making those payments. Fortunately, even if a homeowner becomes delinquent, it does not necessarily mean that a foreclosure must occur.
A great first step is to get in touch with your lender. You must be willing to be open and honest about your financial situation. Banks are in the business of lending money and want it to be repaid. They are not in the real estate business and do not want to own homes. A defaulted loan is bad for their record with regulators and with their shareholders and can result in a substantial financial loss to them. If a bank is required to repossess a home, it must then assume responsibility for insuring it, maintaining it, paying taxes on it, and incurring commissions and fees to sell it. Do not ignore a lender's attempts to contact you. In fact, you should reach out to them as soon as a problem begins to develop. Homeowners and lenders should work together to develop a solution since it's in both their best interests to do so.
There are several alternatives to foreclosure:
Pay the delinquent amounts. Generally speaking, lenders are required to accept delinquent payments and reinstate the loan. Of course, the amounts owed will not be just the monthly payment, but might also include late fees, additional interest, and legal fees if a foreclosure has begun. Certified funds may also be required in order to reinstate the loan.
Forbearance. Often, lenders will agree to a plan that will allow a partial payment of the delinquent amounts every month in addition to the regular monthly payments. This is called Forbearance. The lender may also agree to suspend payments for a certain period of time until a repayment schedule can be started.
Reamortization. In a reamortization, the delinquent amounts are added to the loan balance as a way of bringing the mortgage payments current. This move increases not only the total loan amount but also the monthly payments. Of course, the increase in payment will not be as large if the life of the loan is also extended.
Payment Assistance. Help may also be available from state and local governments or private organizations that help people in such situations pay all or part of their mortgage obligation for a limited period of time.
Refinance. It is often believed that if a homeowner defaults on a mortgage and is in the foreclosure process that refinancing with a different lender is impossible. This is not the case. A candid conversation with a loan officer about what caused the situation in the first place and how you can overcome it will often result in a new loan being obtained. However, it should be expected that the interest rate and terms of such a loan may be substantially more expensive than the existing mortgage. Once the new loan is obtained and an on-time repayment schedule is established for at least two years, a new mortgage at a more attractive interest rate may become available.
Emergency Loan. Regardless of its source, an emergency loan is simply one that helps avoid the foreclosure. It is important that it accomplish more than just paying the delinquent amounts because all that accomplishes is creating more debt and potentially worsening the situation. An emergency loan may be structured to reduce debt to a more manageable level or modify the monthly obligations to provide time to overcome the unusual event that caused the problem in the first place. Emergency loans may be available from lenders, family members, employers or friends.
Sell the Home. Ultimately, if these options are not available or it seems unlikely that a recovery from the event will be possible, it may become necessary to sell the home. However, a sale creates the opportunity to pay the entire mortgage balance and still be paid for any equity that may have accumulated. Depending upon the stage of the foreclosure process and the laws of the state in which the property is located, a sale may have to occur very quickly (a matter of a few days) or additional time for a more traditional listing process may be available. There are many investors that specialize in assisting homeowners in this process. Although the owners ultimately choose to leave the home using this method, it protects a foreclosure from appearing on their credit record for ten years and it ensures they are compensated for the equity. The most important step is to take action - this situation does not improve with age.
About the author:
Gerald G. Justice is the CEO of JP Investment Holdings LLC. With offices in San Clemente, California and Las Vegas, Nevada, it specializes in purchasing properties in financial distress, such as foreclosures, probates, job loss or transfer, divorce, business failure, etc.