Here are 10 tips to avoid defaulting on your mortgage, and ultimately preventing repossession and foreclosure.
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 home. If you are behind on your mortgage payments or have received notice that you are behind in payments, you need to contact your lender quickly and ask to speak with a loss mitigator. Typically, your lender will mail you a “loan workout” package. This package contains information, forms and instructions. If you want to be considered for assistance you must complete the forms fully and truthfully and return them to your lender quickly. Your lender will review the complete package before talking about a solution with you.
2. A smart simultaneous step is to contact a nonprofit counseling agency that may be aware of programs that could help you, may have personal knowledge of your lender’s flexibility in terms of available options, and may know the best person to contact with your lender. Time is of the essence, so don’t let this step slow the process more than a few days.
3. At the same time, find out what your home is worth so you will know how much equity you have (or if it’s worth less than the mortgage balance). If you have sufficient equity, selling the home if necessary may not be the worst idea if home values are dropping: better to sell it than to lose it!
4. Avoid fee-based for-profit mortgage prevention companies or counseling agencies – many are rip-offs that provide few if any meaningful services for distressed homeowners, and you can get quality counseling for free. Also be wary of investors who advertise offers of immediate cash for your home. Many of them are also unethical or outright crooks, seeking to strip home equity through a variety of techniques. If any firm claims they can stop your foreclosure immediately if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property. Never sign any legal document without reading and understanding all the terms and getting professional advice. Such scams should be reported to the ACCC.
5. 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 involved.
6. Foreclosures are expensive for lenders, so they are usually willing to listen to reasonable ideas that can reduce their potential losses, such as restructuring the loan at lower rates or accepting a “short sale,” which occurs when the lender agrees to let the owner sell the home for less than the mortgage balance, and agrees to forgive the shortfall and not downgrade the homeowner’s credit. Your willingness to cooperate is a negotiating tool if your suggestions are likely to be less expensive than a foreclosure action.
7. Insolvency or Bankruptcy is an option, particularly if your lender is inflexible or your mortgage is on a second home or a rental property.
8. Even if you are current on your mortgage payments but have a fixed loan, thoroughly review your mortgage documents, even if your reset date is many months in the future. Check the reset interest rate or formula for determining the rate and any future rate resets, and see if there are mortgage prepayment penalties.
9. If you think you could have trouble keeping up with the new payments on variable mortgage, consider refinancing into a fixed rate mortgage if possible. Some lenders may be willing to forgive all or part of a prepayment penalty if that payment presents a problem and you qualify for their fixed rate product.
10. Don’t assume that you are immune to a foreclosure in the future. Don’t assume that a mortgage lender’s underwriting process will assure that you’ll not be approved for an unaffordable mortgage in the future. When lenders discovered that they could package and very profitably sell risky loans to investors, they became was less focused on responsible underwriting because they weren’t at risk if they sold the loans. Sound underwriting practices began to deteriorate, eventually causing the current mortgage meltdown. This could happen again.