When You're Behind on Your Mortgage

When You're Behind on Your Mortgage Mortage Problems Plague Homeowners The mortgage meltdown in the United States means that right now, many honest, hard-working people are behind on their mortgage payments, and don't know what to do or where to turn. People who have always felt that "other people" fell behind in their payments are now facing the tough reality of a serious downturn in the economy that does not show any signs up becoming an upturn soon.

Many Homeowners Face Difficulty The most important thing a homeowner can do is realize that there are a record number of distressed homeowners in the United States right now. "You're not alone" may sound like a cliché, but in terms of homeowners facing foreclosure, it's a statement of fact. What Not to Do Some homeowners, when they realize that they are unable to make their payments, decide to "walk away." This is absolutely the worst thing a homeowner can do. A tanning salon owner recently posted on an Internet forum that one of her clients had announced, "We're just going to stop paying the mortgage and rent." This client was, incidentally, having her nails done for $50 at the time.

There are three problems with this strategy of walking away. First, homeowners like the tanning client often do not take the opportunity to change spending habits and learn to manage finances. These people will merely exchange their current financial difficulties for future debt and difficulty. . Many homeowners are financially responsible and still find themselves with mortgage payment problems, but many of the homeowners who are currently abandoning their mortgages are either starting or continuing a pattern of financial irresponsibility. The second problem with mortgage abandonment is that an abandoned mortgage on a credit report can wreak havoc on the homeowner's entire life for many years in the future. Many people think, "Oh, we'll just rent," but with the housing crunch, real estate owners can be even more choosy about who they rent to. If a rental applicant has made an honest attempt to pay their mortgage but finally lost the struggle, the rental agency will be more sympathetic than if the prospective renter just decided to ignore their largest financial obligation.

Creditors are not anxious to extend new obligations, including leases, to people who have demonstrated that they do not take their responsibilities seriously. Many people walking away from a mortgage think only in terms of not needing to finance another home, and don't consider the consequences of an abandoned mortgage on the rest of their lives. Aside from purchasing or renting a car, renting an apartment, and other financial transactions, a negative credit report can actually impact a person's employment. Employers can, and many do, check credit reports, and an abandoned mortgage is not a good employment reference. The third problem with walking away from a mortgage is emotional. Some people truly won't suffer any remorse or regret, but those who are honest with themselves will probably suffer some emotional stress and regret. Facing foreclosure is traumatic and stressful enough, without making that stress and trauma worse unnecessarily. The Worst That Can Happen For homeowners unable to pay the mortgage, facing that reality can bring emotional relief and make it easier to look for a solution to the problem. Many homeowners find that when they think through the worst that can happen, they realize they can deal with the worst.

They won't like it, but they can survive the worst that can happen. This frees up energy to try to avoid that worst. Work with Your Lender The last thing most distressed homeowners want is to communicate with their lender. This is understandable, but the homeowner's best hope to save the home is to try working with the lender. The real estate crunch has hit lenders very hard, as well, and some may be unable or unwilling to work with their mortgage holders. Many lenders, however, are willing to try to help the homeowner heal the debt and avoid foreclosure. Especially now, when foreclosed homes are flooding the market, banks prefer not to foreclose. Banks are not in the real estate business; they're in the mortgage business. When they foreclose on a home, that puts them in the real estate business, owning a home which they then have to find a way to sell, at a loss. Workout Options Lenders often offer workout options to rehabilitate a loan. Reinstatement, a common workout solution, may allow the homeowner to bring the mortgage current if they know they will be getting a lump sum of money at a specific time--for instance, a salary bonus, tax refund or insurance settlement. The lender will reinstate the loan after payment of the total amount due. Reinstatement is often accompanied by forbearance, which means that the lender will allow the homeowner to either reduce payments or suspend payment for a specified period of time.

A forbearance is always accompanied by agreement to another method to bring the loan current, such as a reinstatement. Lenders may agree to a payment plan in which the homeowner pays the monthly mortgage payment and a portion of the past due amount. This is helpful if the financial difficulty was short-lived, due to a job loss or medical problem, for instance. Payment plans are not as helpful for homeowners with long-term payment difficulties. For homeowners whose mortgages whose payments have become unaffordable, for instance because of adjustable rate mortgages, a mortgage modification may be the best option for saving the home. Communicating with the lender and attempting to resolve the situation is the best way to save the mortgage and avoid the extremely unpleasant consequences of foreclosure. Getting Out of a Mortgage When the homeowner cannot pay the mortgage and it is not salvageable, a lender may agree to a sale of the home. This is difficult in the current real estate market, but a "short sale" may be possible. This involves selling the house for less than the outstanding mortgage amount, but for an amount agreed to by the lender. The homeowner pays the lender the sale amount and is released from the mortgage.

Another option is an assumption, in which another buyer assumes, or takes over, the mortgage and takes possession of the home. This is a very unlikely option in the current real estate market, but is still worth investigating. Avoiding Scams Many homeowners fall prey to scammers who take advantage of people who are desperate enough to try anything if it sounds plausible. One of the most common fraudulent schemes is called equity skimming. A "buyer" approaches a homeowner and promises to take over the mortgage if the homeowner signs over the deed to the house and moves out. The fake "buyer" then takes possession of the house, but the homeowner is still responsible for the loan, as no assumption papers were signed, and has no home. Another favorite scheme is to offer real estate "counseling" for a fee. The federal government offers free and low-cost real estate counseling through the FHA. Most "counselors" approaching distressed homeowners in fact offer no real assistance, and take advantage of strapped mortgage holders. Weathering the Storm Looking at the checkbook and the paycheck and realizing that the house payment can't be made is one of the most difficult situations most people face. Knowing that an obligation can't be kept is stressful, and losing a home is extremely traumatic. It can rip a family apart, and cause lasting emotional damage as well as the damage to the homeowners' credit reports. So what should homeowners do in this situation? How can they get through this difficult time with their credit reports and emotions relatively intact? The most important thing a homeowner can do in this situation is to communicate with the lender. Many homeowners start discarding mail from the lender rather than opening and dealing with it. This is a serious mistake, because early letters will often offer assistance in making the mortgage good, and later letters (if the early ones are ignored) often contain legal notices. Ignoring the mail will not impress a foreclosure judge.

It is easy to feel desperate and believe "nothing can be done." The fact is, something can always be done, but that something may not be the preferred thing. The only way to know is to reach out to the lender, try to resolve the situation, and make a genuine effort. Some homeowners are losing their homes right now despite their best efforts. Many lenders simply can't help homeowners who fall into default, and many borrowers have no financial options for rehabilitating their debt. That is a sad fact, but it is a fact. Knowing that other homeowners are facing foreclosure and actually losing their home, and knowing that everything that can be done, has been done, are the two greatest advantages a homeowner has. As for the future…many homeowners who lose their homes will be able to recover and own a home again someday. Damage to the credit report is not permanent, and many future lenders will be sensitive to the situation, providing the homeowner has made a solid attempt to save the mortgage, rather than simply walking away.

About the Author

Seth is author of this article on Denver Mortgage. Find more information about Colorado Mortgage here.



by Seth Taylor