Do you want to avoid foreclosure and hold onto your home? If you are behind a payment or two on your mortgage or if you realize that you are going to need some relief in order to avoid falling behind, get in touch with your lender right away. You may want to discuss refinancing and/or modifying your loan. Both may be options assuming that your income is stable and you are not "under water" on your home, i.e. you owe more on your home than it’s worth in today’s market.
Another option is to sell your home in a short sale.
We are not saying that it will be easy to avoid foreclosure once you’ve fallen behind on your mortgage. It may not be. In fact, there are many reports of homeowners who want to figure out a way to hold on to their homes, but get nothing but the run around from their lenders. And quite honestly, depending on your situation, it may be better to let your home go, and move on as difficult as that may be.
Refinance. Refinancing your existing loan involves getting a new home loan you can afford, and using the loan proceeds to pay off your current mortgage. If your lender refuses to refinance your loan, shop around -- other lenders may be willing to work with you. If you can’t find any lenders willing to work with you -- maybe because the value of your home is less than the total amount you still owe on it, or because your credit is damaged -- a federal Home Affordable Refinance Program (HARP) loan may be the answer, assuming your current loan is guaranteed by Fannie Mae or Freddie Mac. To find out if you qualify for a Home Affordable Refinance visit YouCanRefi.com.
Listen to an interview with a mortgage expert as he explains how HARP works.
Modify the terms of your loan on a temporary or permanent basis. It may be possible for you continue paying on your mortgage if your lender will agree to change the terms of that loan -- lower the interest rate you are paying and give you more time to pay off the loan, for example. Your lender may offer its own modification program, or you may be eligible for a Making Home Affordable (HAMP) loan modification. Visit the Making Home Affordable website to determine if you qualify for a HAMP modification. At this site, you’ll also find an online payment estimator for calculating your monthly mortgage payments if you qualify for a modification.
Ask your lender about forbearance. A forbearance agreement gives you some breathing room when you are experiencing a temporary financial crisis by letting you pay just a portion of your regular mortgage payment or maybe even no payment at all, for a limited period of time. Once that period ends however, you’ll have to resume making your regular loan payments and you’ll also have to pay something extra each month in order to pay down the past due amount on the loan -- the amount you were not paying during the forbearance period.
In other words, once the forbearance period is up you’ll be obligated to pay more to your lender each month than you were when your money troubles began. Therefore, it’s critical that you not sign a forbearance agreement until you’ve read it very carefully, understand all of its terms, and unless you are sure that you can live up to each and every one of them, including paying the extra money.
Ask your lender for a payment plan. If you’ve missed just a few mortgage payments and your income is stable, your mortgage company may let you get caught up over time according to a written schedule you both agree to. There may be different options available to you depending on who holds your loan. A housing counselor may be able to help you identify payment plan options you can afford.
Negotiate a short sale. A short sale involves selling your home for less than what you owe on it. Why would your lender agree to let you do that? Because generally, the lender will lose less money on your mortgage through a short sale than if it has to foreclose on your home.
To qualify for a short sale you generally have to show the lender that you are experiencing a financial hardship. There are a variety of types of financial hardships that might help you qualify, for example; you’ve experienced a decrease in your income, you’ve been through a divorce since you bought your home, or maybe your living expenses have gone up.
Working out the terms of a short sale can be time-consuming and frustrating so we don’t recommend you attempt to do it on your own. Get the help of someone who has negotiated short sales in the past. You’ll probably need to work with both a real estate attorney and a real estate professional.
One of the reasons why you need the help of an experienced pro is that during your short sale negotiations you will want to try to get the lender to agree to forgive the deficiency you will owe as a result of the sale. A deficiency is the difference between what you still owe on your home and the amount that your home sells for. If your lender won’t forgive the deficiency, you will be on the hook for that amount. As a result, if you cannot pay it, you may starting hearing from debt collectors. Since deficiencies in these situations can add up to tens – or even hundreds – of thousands of dollars, you definitely want to avoid one.
Listen to an interview with a real estate attorney who explains how short sales work here.
Turn your home into a rental. You may want to find one or more roommates to help cover the cost of your mortgage payment, or you may want to rent out your home and move into an apartment or home you can afford. This is a good option only if the rental income from your home will cover the amount of your mortgage, your homeowner’s insurance, and your property taxes (assuming those two expenses are not included in your monthly mortgage payments). You’ll also need to make sure you have money for any repairs and maintenance that need to be done to your property, and you’ll have to comply with the landlord-tenant laws in your state and community. Before you rent out your home, make sure you check out what those laws say about your responsibility as a landlord.
Warning: Turning your home into a rental property can have tax consequences. Be sure to talk with a tax professional if you decide to try this.