Lenwood and Denise Shaver were thrilled after the birth of their first child in 2002. They had purchased their first home the year before, had a comfortable dual income household, and by most standards were living a good life.
Then, “After the first baby was born, I became pregnant again, and six months after the second baby I became pregnant a third time,” Denise explains. “So basically, we had three babies in three years.”
When the couple decided that Denise should give up her full-time job to stay home and raise the children, the family’s income decreased and they began to miss payments on their home. “We got about three months behind on our mortgage,” says Denise. “Because we had a very good record in the past, the lenders called us immediately to find out what was going on.”
Loss of income is one of the main causes of foreclosure, according to Kenneth Wade, CEO of NeighborWorks America. “In many cases people have no control over the situations which lead to foreclosure–no control over their loss of income or unforeseen medical bills.”
Unfortunately, lenders aren’t always interested in the life circumstances that lead to foreclosure. Making sure mortgage loan obligations are fulfilled is their primary concern. Still, homeowners can educate themselves and act before they get too far behind on payments.
The Shavers researched various agencies, initially to assist them with paying utility bills. By that point, they had already gotten rid of a car to trim expenses, Denise had taken a part-time job, and the couple refinanced to a lower interest rate, which reduced their mortgage payment to about $650. Eventually the Ohio couple contacted the Columbus Housing Partnership, one of 220 NeighborWorks America organizations that provide financial support, technical assistance, and training.
Through the partnership, the Shavers took part in NeighborWorks’ Foreclosure Prevention Program. Their counselor, Carolyn Einloth, says clients receive a maximum of $2,400 or three months of payments, whichever is less, to stop foreclosure. To be eligible for the program in Columbus, a client’s income must be 50% or less of the area’s median income–adjusted for family size–he or she must ensure that the lender will accept payment from the partnership.
But before getting aid, the Shavers had to have a budget that showed they could meet their monthly expenses. “Our counselor helped us make a budget so we wouldn’t end up in that circumstance again,” says Denise. “Columbus Housing Partnership gave us three months’ missed mortgage payments to catch us up. Our counselor told us it was a one-time deal.”
But in life, trouble can happen at any time.
“Unforeseen events happen to people in all communities,” says J. David Washington, president and CEO of Forbes Capital Group, who gives seminars on foreclosure prevention. “Not to make excuses, but people of all backgrounds can suffer from divorce, loss of work, and poor budgeting.”
A relative’s legal troubles pushed Cheryl Webster, 41, into foreclosure twice within the last two years. “I had a close family member who got into some legal trouble, and there were legal bills I had to pay,” she says. In 2002, Webster, a single mother with four children in Sayerville, New Jersey, began to miss mortgage payments as she channeled $20,000 of her income toward her relative’s legal fees. Webster contacted Chase Manhattan bank, her lender, which helped her avert foreclosure. “I explained my family issue, and they told me about several Chase programs they offer, such as their homeowner’s assistance program and their forbearance program. They told me that I could take the six months of mortgage payments that I owed and attach them to the end of my mortgage. So instead of my mortgage payments ending in June 2028, they’ll end in December 2028.”
Acting fast is key. “It is crucial to contact your lender as early as possible, after you find yourself unable to make mortgage payments,” Wade says. “Most major lenders have programs for mortgage modification, forbearance, or other remedies that are short of foreclosure. I have spoken with lenders who told me that more than half the people who go into foreclosure never respond to letters from the lenders, nor do they contact the lenders themselves. The longer you wait to contact your lender the more limited your options become.”
The option homeowners should be most aware of, says Washington, is a cure. Just before you know you may miss a payment, ask for a cure, which is a 30-day grace from your mortgage payment. It is usually only a one-time option.
However, the legal fees that haunted Webster persisted and, even though she had adjusted her loan, by late 2004 she found herself facing foreclosure again. Webster investigated Chapter 13 bankruptcy and a home equity loan before deciding to refinance at an interest rate of 11%, which was significantly higher than her original rate of 7.78%. While refinancing resulted in higher mortgage payments because of her spotty credit history, Webster did not lose her home.
For current and future homeowners, preventing foreclosure starts before the initial purchase:
Understand all the expenses that go into homeownership before you buy. Buying a home without being aware of taxes, insurance, repairs, and other expenses can produce a situation where foreclosure is imminent, says Matthew King II, president of MK Capital Resources L.L.C., a mortgage brokerage firm in New York City that also specializes in foreclosure prevention. “So many people live paycheck to paycheck, they don’t have any cash reserves. You really should have three to six months of mortgage payments in savings just in case.”
Make your first home a smaller home. King believes that less stringent income restrictions have allowed many people to realize the dream of homeownership, but relaxed restrictions may have led them to underestimate the costs of homeownership.
“If you’re paying $1,000 for rent, and you know that you are already stretching things, if you go out and get a mortgage at $1,000 a month, then lose your job and have no savings, the ramifications of missing mortgage payments are much greater in terms of your credit than the ramifications of missing rent payments would have been,” King says.
He advises people to start small and trade up. “Instead of buying the $200,000 home you really can’t afford, make your home purchase more practical.” He says it’s best to buy a moderately priced home that can appreciate, or buy a fixer-upper, make the repairs, and reap the financial benefit. King warns against purchasing a home that needs more repairs than you can afford.
If you are in danger of missing mortgage payments or are already behind, seek help from a community-based organization. “Many community-based organizations provide loan programs and grant assistance,” says Wade. Two Websites to explore are NeighborWorks America (www.nw.org) and the U.S. Department of Housing and Urban Development (www.hud.gov). “Both the NeighborWorks and HUD sites allow you to look up homeownership counseling centers by state. Of course, larger urban areas will have more resources, but always contact your city or county government’s housing department, as they should know the groups who can help you if they can’t themselves.”
Contact your lender immediately about your situation. “Contact the community-based organization first because they can give you a general idea of the types of programs that your lender offers before you go to them,” says Wade. Once you contact the lender, they can allow payment delays, mortgage modification, and repayment plans, or they may negotiate a lump-sum payment (see sidebar).
“It is important to note that your loan servicer–or who
you get your monthly statements from–may be a different entity from the one who owns your loan,” Wade adds. “The first step is to contact the number on your statement and they will advise you on who you need to call.”
Document all important conversations and information. You should keep a record of all correspondence with the lender during the foreclosure process. These details may help you construct a positive outcome down the line if you wind up in court.
Be prepared for the possibility of selling your home. Sometimes reality bites, and you may have to regroup. “If catching up on your payments does not seem possible, selling your home through various means is a better option than foreclosure, because foreclosure leaves a negative mark on your credit which very well could prevent you from getting a home loan or many other types of credit in the future,” says Wade. “Options range from a straight sell of your home to a deed transfer, where you are essentially giving the property back to the bank. For these sorts of transactions you’ll need an attorney who specializes in real estate, as there are a lot of details that are subject to negotiation.”
Washington notes that creative conveyance is another way to allow a person facing foreclosure to realize at least a minimal profit from a home sale. “Let’s say your home is worth $300,000, currently you have a balance of $100,000, and your payments are behind by $25,000. The banks probably won’t touch you, so refinancing is out. But instead of losing your home altogether, you can sell your home at a discount to a friend, family member, or a real estate agent. You may not get $300,000 for your home, but maybe an offer of $225,000. In this situation, you could pay off the $100,000 balance, the $25,000 that is owed, and keep the difference.”
Remember that once you begin discussing foreclosure, everything is a negotiation. The lender will be acting in its own best interest. You may have to take on another job, or ask friends and family for a loan to keep your home.
If you come across a lender unwilling to set up a repayment plan, it may be best to take your losses by selling your home so that you can preserve your credit rating and purchase another, less expensive home down the line.
NEGOTIATING FORECLOSURE SOLUTIONS
Facing foreclosure is a serious situation, but if you remain calm and take action quickly, you
However you find yourself facing foreclosure, Washington says there are terms you should know that may help you negotiate a favorable outcome with your lender:
[Mortgage modification] The structure of a loan is changed to allow the arrearages to be attached to the end of the mortgage.
[Forbearance] Mortgage payments are suspended for a short period, with the understanding that an agreed upon solution to making up missed payments will go into effect after.
[Loan repayment plan] The lender agrees to allow the borrower to pay the current mortgage payments plus a certain percent of the missed mortgage payments. These simultaneous payments continue until the previously missed mortgage payments are paid off.
[Lump-sum payment] The lender may agree to give the borrower a specified amount of time to raise a lump-sum payment to cover missed payments.
[Bankruptcy] This is the least preferred option and should be considered a last resort because of the long-range negative effect it will have on the borrower’s ability to secure credit in the future. Due to recent changes in bankruptcy laws, filing is more rigorous and more expensive. It is more advantageous to negotiate a repayment agreement with the lender yourself rather than have one handed down through the courts.
“With Chapter 13 bankruptcy, you are allowed to pay off debts over time. Under certain circumstances you will pay your secured debt in full and may be able to pay unsecured debt for as little as pennies on the dollar,” says William C. Johnson Jr., a Washington, D.C., attorney specializing in consumer protection and civil rights.” Filing may allow you to keep your home and pay off missed mortgage payments and interest over time.
Johnson also explains that it is important for homeowners to understand that when they save their home from foreclosure through the courts, there will be other fees to pay in addition to the mortgage itself. “When someone pays their arrearages, this consists of the owed mortgage payments in addition to their current monthly mortgage, taxes, escrow payments, corporate advances, and attorneys fees that are charged by the mortgage servicer and the substitute trustee who will be receiving the payments.”