Mortgage and ForeclosureSource: US Department of Housing and Urban Development

10-Tips for Avoiding Foreclosure

Are you having trouble keeping up with your mortgage payments? Have you received a notice from your lender asking you to contact them?

If you are unable to make your mortgage payment:

1. Don't ignore the problem.

The further behind you become, the harder it will be to reinstate your loan and the more likely that you will lose your house.

2. Contact your lender as soon as you realize that you have a problem.

Lenders do not want your house. They have options to help borrowers through difficult financial times.

3. Open and respond to all mail from your lender.

The first notices you receive will offer good information about foreclosure prevention options that can help you weather financial problems. Later mail may include important notices of pending legal action.  Your failure to open the mail will not be an excuse in foreclosure court.

4. Know your mortgage rights.

Find your loan documents and read them so you know what your lender may do if you can't make your payments.  Learn about the foreclosure laws and timeframes in your state (as every state is different) by contacting the State Government Housing Office.

5. Understand foreclosure prevention options.

Valuable information about foreclosure prevention (also called loss mitigation) options can be found online.

6. Contact a HUD-approved housing counselor.

The U.S. Department of Housing and Urban Development (HUD) funds free or very low-cost housing counseling nationwide. Housing counselors can help you understand the law and your options, organize your finances and represent you in negotiations with your lender, if you need this assistance. (800) 569-4287 or TTY (800) 877-8339.

7. Prioritize your spending.

After healthcare, keeping your house should be your first priority.  Review your finances and see where you can cut spending in order to make your mortgage payment.  Look for optional expenses--cable TV, memberships, entertainment--that you can eliminate. Delay payments on credit cards and other "unsecured" debt until you have paid your mortgage.

8. Use your assets.

Do you have assets--a second car, jewelry, a whole life insurance policy--that you can sell for cash to help reinstate your loan? Can anyone in your household get an extra job to bring in additional income?  Even if these efforts don't significantly increase your available cash or your income, they demonstrate to your lender that you are willing to make sacrifices to keep your home.

9. Avoid foreclosure prevention companies.

You don't need to pay fees for foreclosure prevention help--use that money to pay the mortgage instead. Many for-profit companies will contact you promising to negotiate with your lender. While these may be legitimate businesses, they will charge you a hefty fee (often two or three month's mortgage payment) for information and services your lender or a HUD-approved housing counselor will provide free if you contact them.

10. Don't lose your house to foreclosure recovery scams!

If any firm claims they can stop your foreclosure immediately and if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your own home! Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional or a HUD-approved housing counselor.

Frequently Asked Questions Regarding Mortgages

Source: American Institute of CPA's (360 Degrees of Financial Literacy)

1. I am behind on my mortgage payments. Will my lender begin foreclosure proceedings?

When you buy a home using a mortgage loan, your home becomes collateral for the loan. If you do not repay the mortgage loan as agreed, your lender has the right to take your property and sell it to satisfy the debt, also known as foreclosure.

Whether or not your lender will begin foreclosure proceedings depends on exactly how far behind you are on your mortgage payments. If you are only a month or two behind on payments, your lender will not likely begin foreclosure proceedings. Typically, a lender will not file for foreclosure unless the lender is absolutely certain that the borrower is defaulting on the loan.

It is important to remember, however, that late mortgage payments can damage your credit rating. If you are more than 30 days late on a mortgage payment, it will appear on your credit report and can remain there for up to seven years. In addition, most lenders will charge a late fee if you miss the due date for your mortgage payment.

If you are in a situation that will impact your ability to make timely payments (e.g., you or your spouse has become disabled), you should seek advice on how to deal with your creditors rather than wait until you are at risk of losing your home.

2. I'm a first-time homebuyer, and I don't have a lot of cash to put down on a house. What type of mortgage would be best for me?

If you are a first-time homebuyer and don't have a lot of money for a down payment on a home, you may want to consider obtaining a mortgage through a government mortgage lending program such as those offered through the Federal Housing Administration (FHA) and the Department of Veterans Affairs, formerly known as the Veterans Administration (VA). Generally, these types of mortgage programs are an excellent choice for first-time homebuyers with moderate incomes, because the interest rates are set below current rates and little or no down payment is required. Consult your mortgage lender to see if you are eligible for either an FHA or VA mortgage.

In addition to government mortgage lending programs, many mortgage lenders offer special programs for first-time homebuyers that require little or no down payment. Shop around and compare the mortgage rates and terms that various lenders offer to find a mortgage that is geared toward first-time homebuyers.

Another option for individuals who have little or no down payment for a home is a rent with option to buy arrangement. A rent with option to buy arrangement allows you to rent a home for a certain period of time (usually three years) while you accumulate a down payment. At the end of the lease term, you have the option to purchase the home for a specified price. While you rent the home, part of each rent payment is credited toward the purchase price of the house, in effect creating a down payment.

3. I'm having a hard time selling my home. Should I take out a reverse mortgage?

A reverse mortgage is a loan secured by the equity in your home. With a reverse mortgage, you borrow against the equity you have built up in your home using a mortgage loan. In return, the mortgage lender either gives you a lump sum of cash or pays you a predetermined monthly amount for a fixed number of years or until the house is sold. At the end of that time, you'll owe the mortgage lender the principal and interest due on the house. To repay the loan, you or your estate may have to sell the house or turn it over to the mortgage lender. It's known as a reverse mortgage because unlike a traditional mortgage, the principal balance of the loan gets larger over time, rather than smaller.

Reverse mortgages were developed to assist elderly citizens who own their own homes but need an additional source of income. They work best in situations where homeowners wish to stay in their homes until they die. If you are approaching retirement and are unable to sell your home, a reverse mortgage may be an option for you.   However, it can limit your ability to move in the future, because you will need to repay the reverse mortgage from the sale proceeds. In addition, if you are unable to afford or qualify for a refinanced mortgage when the term of the reverse mortgage is up, you may be forced to sell your home. A reverse mortgage also lowers the value of your estate, because it reduces the equity you have built up in your home. This is a disadvantage if you were planning to leave your house as an inheritance for your family.

4. I'm retired now and own my home outright, but I need money to live on. How can I use my home to raise some money without selling it?

You may want to consider a reverse annuity mortgage, more commonly known as a reverse mortgage. Developed to help the elderly find an additional source of income while remaining in their homes, reverse mortgages are steadily proliferating and in many instances are federally insured.

Generally speaking, reverse mortgages are offered at fixed rates of interest. (Federally insured Home Equity Conversion Mortgages are also offered at adjustable rates.) All parties to the deed must be 62 or older before you can qualify. When you apply, your lender appraises your property to determine how much equity is available for you to borrow against. The older you are at the time of your application, the larger the percentage of your equity you may access. Once this amount is determined, you may borrow against it through one of three types of reverse mortgages.

A tenure reverse mortgage pays you a designated sum of money each month. The payment amount depends on your age, the equity in your home, and the interest rate of the loan. As you receive your payments, both the principal balance and the interest owed on the loan grow. Accumulated principal and interest are repaid upon sale of the property, which may not occur (unless you choose to sell) until after the death of the last party to the mortgage. Thus, you can use a tenure reverse mortgage to supplement your monthly income indefinitely. You do not run the risk of being required to sell your home. However, the size of your estate will be reduced because you are continuously reducing the equity in your home.

A term reverse mortgage allows you to receive preset monthly payments for a specified length of time (the term of the mortgage). Generally, all other factors being equal, term reverse mortgages will give you larger monthly payments than do tenure reverse mortgages, simply because the term of the mortgage is fixed rather than indefinite. When the term is up, the loan must be repaid. This might be accomplished by refinancing your home with a conventional "forward" mortgage. If this is not possible, however, and you have no other means to repay the loan, you must sell your home to satisfy the reverse mortgage. Thus, you might want to consider a term reverse mortgage only if you plan to sell your home before the expiration of the term, and need money in the meantime for medical care or home repairs.

An equity line reverse mortgage allows you to take different lump-sum amounts of equity out of your home as desired or needed up to a predetermined maximum amount. Depending on the mortgage agreement, the principal amount you borrow, plus accumulated interest, may become due either at a preset future date (as with a term loan) or at an unspecified date (as with a tenure loan).

5. Should I refinance my home mortgage?

Mortgage refinancing refers to the process of taking out a new home mortgage and using some or all of the proceeds to pay off an existing mortgage on your home. The main purpose of refinancing is to obtain a lower interest rate or lower your monthly payments by extending the term of your loan. Remember that if you extend the term of the loan, you will reduce your monthly mortgage, but you will end up paying more total interest over the years.

If you do refinance your home mortgage, you want to make sure that your monthly savings from refinancing will pay back the costs that are associated with refinancing while you are still living in your home. If you move before your refinancing has paid for itself, you really won't be saving any money. You can determine how long it will take for you to pay off the refinancing by dividing the cost of refinancing (points, closing costs, and private mortgage insurance) by the amount you will save each month from refinancing. Alternatively, you can eliminate the problem if you can find a no-point, no-closing-cost mortgage.

Generally, there are two types of mortgage refinancing: no cash-out refinancing and cash-out refinancing. No cash-out refinancing occurs when the amount of the new loan does not exceed the mortgage debt that you currently owe. Typically, you can borrow up to 95 percent of your home's appraised value with this type of refinancing.

Cash-out refinancing occurs when you borrow more than you owe on your current mortgage. You are generally limited to borrowing no more than 75 to 80 percent of your home's appraised value with cash-out refinancing. You can use the excess proceeds in any way you wish. Most people use this type of refinancing to pay off other outstanding loans, since the interest rate they pay on the extra cash they borrow will usually be less than the interest rate on the debt that they pay off (e.g., car loans, credit cards). Also, mortgage interest is typically tax deductible, while consumer debt is not. This strategy is useful if you use it to reduce your debt payments and you do not start charging items on your credit card again.

6. What's the difference between a home equity line of credit and a second mortgage?

A home equity loan is a loan that is secured by your home. If you repay the loan as agreed, your lender will discharge the mortgage. If you do not repay the loan as agreed, your lender can foreclose on your home to satisfy the debt. Generally, the amount that you can borrow is limited to 80 percent of the equity in your home, although in some situations this amount may be higher. The actual amount of the loan will also depend on your income, credit history, and the market value of your home. The two distinct types of home equity loans are the home equity line of credit (HELOC) and the closed-end home equity loan, often referred to as a second mortgage.

A HELOC, which is the more popular loan, is structured as a revolving line of credit. You can borrow as much as you need, whenever you need it, by writing a check as long as your total borrowing does not exceed your credit limit. Because it is a line of credit, you make payments only on the amount you have actually borrowed, not the full amount available. Borrowers will usually set up a HELOC so that it is available for unexpected expenses. It may also be beneficial to use your home equity loan to purchase a car or pay your child's college tuition, since the interest is generally tax deductible.

A closed-end home equity loan, or second mortgage, is a loan for a fixed amount of money that must be repaid over a fixed term, just like your original mortgage. Borrowers typically use closed-end home equity loans to pay for a single large expense, such as a major home improvement or college tuition.

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