There can be one of four different outcomes:
- You bring your payments current and your loan is reinstated. (Happy ending)
- You sell your home and pay off the loan, keeping “foreclosure” off your credit record. (You have to move but your credit rating is in tact.)
- You do nothing and your home is sold at auction by an attorney, trustee, or the local sheriff. (Not good.)
- You do nothing and the bank re-possesses your home with the intention of selling it. (Not good.)
The one thing you can take comfort in is that your lender — the bank or mortgage company — does not want your home. It’s in the finance business, not the real estate business. In other words, it is in your lender’s best interest to come up with an affordable plan that will enable you to keep your home.
Even if you get stuck in what feels like terminal hold, you should hang in there. It may take 15-20 minutes to get through. But they will respond and they will help you. The reality is it costs them so much more money to initiate foreclosure.
Keep in mind that the days when the bank on “Main Street” held the actual mortgage on your house are long gone. Today, whether your loan was issued by a bank or a mortgage company, that institution no longer owns it. Instead, it was sold, bundled with other mortgages, and
re-sold as a package to investors.
Everyone I spoke to on this topic said that if it looks as though you’re going to have a problem making your mortgage payments, you should FIRST approach your lender to see if they’re willing to work with you.
Moreover, sooner is better than later. It’s much better to say, “We are going to have a tough time making our monthly payment when the lay-offs begin two months from now,” instead of, “We’re not going to have the money to make our mortgage payment tomorrow.”
Usually, the solution involves re-financing your outstanding balance. Your new, more affordable loan, simply pays off your old one.
Naturally, the longer term and higher interest rate mean that you will ultimately pay more for your home than if you had bought it with a 15-year mortgage. However, if your financial situation improves, you can always make bigger monthly payments than required and pay off the 30-year loan sooner.
It really comes down to this: how much is it worth it to you — literally — to remain in this house?
Mazur, who was a mortgage banker, advises you to lay your cards on the table when you approach your lender. He says to explain honestly why you can’t meet your payments. “For instance, ‘I lost my job due to serious medical issues,’ or ‘I bought more house than I can afford.’”
If your situation is expected to be temporary, rather than initiating a new loan process, Mazur suggests requesting “forbearance.” This might involve having no payments for nine months and then at the beginning of month No. 10 you resume paying your mortgage and also start paying back the amount forgiven, spread over, say, the next 18 months.
If all else fails and you have to walk away from the house, at least leave with your credit rating in tact. Mazur says in California and other high cost states, he’s seeing a lot of “short sales,” where cash-strapped homeowners sell for less than the balance owed on the mortgage. Then they “make arrangements with the lender to pay the difference over time.” This lets you avoid having “foreclosure” stamped on your credit history.
Another strategy to preserve your credit rating is where the lender agrees to write off the loan and issues you a 1099 for the amount. The kicker, of course, is that you will have to pay income tax on this amount. Still, it’s better than getting your credit rating trashed. Mazur describes this technique as “very common.”
The point is: be proactive. Approach your lender before you get into trouble. Start by calling the phone number printed on your monthly mortgage statement. You know, right after the words “Call us.” They mean it.
It really comes down to this: how much is it worth it to you — literally — to remain in this house?
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