Given that their mortgage payment is probably the biggest and most important expense in a homeowner’s budget, falling behind on payments can be a frightening and complicated problem.
Once a homeowner falls behind on the mortgage payments, the bank may initiate foreclosure proceedings, which may result in a property owner losing their home, damaging their credit and unable to find alternate housing. There are, however, a few options to foreclosure that homeowners should keep in mind when they anticipate falling behind or have trouble making their mortgage payments.
Negotiation: Contact Your Lender
Prior to falling behind on your mortgage payments or immediately afterwards, contact your mortgage lender to discuss your options and work out a deal. The bank enter into a forbearance agreement with you that allows you to not make payments for a short period of time, enabling you to get back on your feet.
“When a lender offers forbearance, they are taking control of the situation so that they can maneuver whichever way best serves the lender,” says real estate attorney Taylor McCaffrey.
You may also request a modification of your mortgage payments to make them more affordable in the short term. Your lender should have all the information regarding your situation in order to offer a viable solution. Let them know if you have lost your job or have fallen ill, and how you will find a solution to these issues. Banks can be sympathetic if you’re honest from the start.
“These are experts who have helped out hundreds of homeowners in similar circumstances. They have the expertise and knowledge to give you an honest assessment of your situation, outline your options and help ensure that if you do contact your mortgage servicer to seek a loan modification, your application doesn’t get lost,” said Sean Coffey, a former housing counselor for California Reinvestment Coalition, a consumer advocacy group.
Refinance Your Loan Terms
Refinancing your mortgage loan may alleviate some of the pressure of making your payments. It is important that refinancing now only result in lower monthly payments, but also, lower interest rates. If your current mortgage is for 15 years, a 20- or 30-year mortgage could reduce your payments dramatically.
Research low interest rates and closing costs, and ensure that your current mortgage doesn’t stipulate a high prepayment penalty that could make refinancing more complicated and expensive for you.
“When you are refinancing your mortgage, it means you are replacing your original mortgage with another one that may offer you a better deal. Meaning, getting a better interest rate, a better loan term, or both. Paying back a mortgage can be difficult, and refinancing, especially when you have good credit history, can be very beneficial. There could be many reasons that you want to refinance your mortgage, including getting a lower interest rate, agreeing to a shorter loan term, switching between adjustable interest rates and fixed interest rates, or get some cash from your home equity,” says Gerry Nicodemus, a mortgage expert.
Federal Mortgage Modification
There are also federal mortgage relief program that can help you refinance or change the terms of your mortgage loan, resulting in more affordable monthly payments.
The Home Affordable Modification Plan (HAMP), part of the Making Home Affordable plan to stabilize the housing market, allows you to reduce your monthly loan payments by lowering the interest rate, extending the life of the loan and lowering the loan principal.
Deed in Lieu of Foreclosure
To avoid foreclosure, you may ask the bank to accept a deed to the property rather than foreclosing on the property. Though this will result in the loss of the house, it could safeguard your credit rating and enable you to find alternate housing more easily. Also, you won’t be liable for a deficiency judgment if the bank sells the home for less than the outstanding debt.
“While some homeowners want to delay the process while they scramble to pull together the cash to save their home, opting for the deed in lieu of foreclosure can be a relief. It also allows them to begin fresh sooner than they might if they were to go through the process of a full foreclosure. The mental toll on a family waiting to be foreclosed upon is pretty significant, so the deed in lieu gives them some control over the timeline,” says John Moran, a home mortgage specialist in Telluride, CO.
Reinstatement of Defaulted Mortgage
You may also be able to reinstate or cure the default on your mortgage for a specified period of time after the default. State laws govern the amount of time you have to reinstate a defaulted mortgage. Usually, to reinstate a mortgage, you must pay all outstanding payments as well as late fees, bank fees and court costs.
For example, in New Jersey, pursuant to N.J.S.A.2A:50-57(A), “Until the day the final judgment of foreclosure is entered, a homeowner has the right to cure any default in mortgage payments, de-accelerate the loan, and reinstate the mortgage, regardless of whether an answer was filed.”
You have the right to redeem your property at any time after default before your home is auctioned at a foreclosure sale. usually, to redeem the property, you must pay the mortgage in full, as well as any bank fees resulting from non-payment, including collection fees, court costs and attorney’s fees related to the foreclosure process.
According to Alabama real estate attorney, “In every state, borrowers have the equitable right to redeem their home before their property is sold at a foreclosure sale. In order to redeem their home and stop the foreclosure the owner generally must pay off the total amount that they owe on their home, plus additional costs and interest. The equitable right of redemption acts as a second chance for borrowers to save their home from foreclosure after they have fallen behind on their mortgage payments.”
Statutory redemption buying your home back after the foreclosure sale at the price it sold for. Individual state laws specify the redemption period following the foreclosure sale.
In Alabama, for example, pursuant to Ala. Code § 6-5-248(a), “A statutory one year right of redemption exists from the date of the foreclosure. The statutory right of redemption must be exercised in the mode and manner prescribed by statute and may not be waived in a deed of trust, judgment, or mortgage, or in any agreement before foreclosure or execution sale. The foregoing statute thus denies waiver of the statutory right of redemption prior to foreclosure, but does not prevent its waiver post-foreclosure. The statutory right can also be lost by a debtor who fails to deliver the premises to the foreclosure purchaser within 10 days after written demand for possession has been made.”