Avoid Foreclosure Before It Starts

Many homeowners are more susceptible than ever to falling into foreclosure.  CNNMoney.com recently reported that foreclosure rates were up big and pointed to lower lending standards and softeneing markets as contributing factors to the continued trouble for homeowners (VIEW ARTICLE).

Because of the escalating prices in recent years, homebuyers have extended themselves further just to get a foot in the door of the housing market. Many spend far more than the recommended 28 percent of their gross income on housing. And they use creative and sometimes risky financing options like no-down payment, interest-only, negative amortization and piggyback loans, which put them in a much more unstable financial position after they purchase the property.

If you are facing foreclosure, currently in default, or just having trouble making your payments we can help. Avoid the predatory foreclosure hawks and call our caring, knowledgable, and experienced real estate experts today: (980)722-6192

"The chance of a significant increase of mortgage defaults is definitely on the rise in the U.S.," said T.J. Marrs, a national real estate author, speaker and success coach. "The basic problem is that many people have chosen to obtain mortgages which have built-in negative amortization. This means that their balances will actually be increasing rather than decreasing with their monthly payments. Additionally, these mortgages will have an automatically increasing payment over a period of time."

In the past it took a major life event like death, divorce or loss of job to force a homeowner into default. But with their precariously balanced finances, many of today's homeowners are more easily forced into a situation in which they can't cover the monthly mortgage payment. After a few months of missed payments, the bank steps in and begins the process of repossessing the house.

"If someone could barely afford the payment due to the high cost of housing, they will certainly be at a greater risk should there be any disruption in economy or in their personal situation," Marrs said.

While demand continues to outstrip supply, and short-term appreciation continues to skyrocket, homeowners who have missed a monthly payment or two can usually sell their house quickly during pre-foreclosure at a price high enough to pay off the lender and walk away with some cash in pocket. But if supply catches up to demand and appreciation flattens out, homeowners may have difficulty finding a buyer who is willing to pay a price that at least covers the unpaid loan amount.

It's still financially wise to own a home if at all possible. Real estate has historically always appreciated in value over the long term, and current low interest rates offer an excellent opportunity to jump into the market. However, as with all investments, it's important for homeowners and future homeowners to be aware of the potential risks involved and take the necessary steps to mitigate those risks.

Anyone who is considering a home purchase or who owns a home that's not been paid for in full should take the following steps to help lower the risk of falling into default, let alone losing their house to foreclosure.

Live by a budget
A budget creates a structure that prioritizes your monthly income so that you spend your money on what is most important. It protects you from frittering away your cash on whims and ending up short on the items that are critical, like a monthly mortgage payment when you buy a house.

"Very few people manage themselves carefully enough to use an actual budget," Marrs said. "As every dollar slips through a consumer's fingers each month, much of this money is wasted. Many Americans fall into the category of having too much month at the end of the money."

When qualifying you for a loan, your lender presumably evaluates your monthly income to ensure you have enough to live by and still cover the additional housing expenses, namely a monthly mortgage payment and property taxes. But don't leave it just up to them. Before you buy a house, carefully and honestly determine whether your budget can absorb those additional expenses.

If your current budget can't handle those expenses, it doesn't necessarily mean you need to give up your dream of owning a home. Look for ways to free up additional money in your budget for housing expenses. You may need to sacrifice some short-term convenience or creature comforts for the long-term reward of owning a house.

One couple saving for a house decided to keep their $70 thrift-store couch instead of funneling money out of their house savings for the couch they really wanted, which cost upwards of $1,000. They used that money as part of a down payment on their house and were able to buy a couch a couple years later. You can also save a surprising amount of money in small-ticket items like your daily workday lunch. You could pocket at least $100 a month or $1,200 a year just by making your lunch with items from the grocery store instead of eating out for $5-6 each day.

If you don't have a budget already, track all your spending over the course of one month and use that to create a realistic budget that is consistent with the way you live. You may find areas where you'd like to spend less in order to devote more to your housing expenses. Just make sure you live by those adjustments if you decide to make them in your budget.

Leave a margin for good and bad times
Financial planners typically recommend a 6-month savings cushion, meaning people should be able to continue to make all financial commitments for six months if their income is completely cut off. That's a great rule of thumb, but many people aren't there and find it tough to get there because their monthly income is already stretched to the limit.

But if you want to drastically lower the risk of ever defaulting on your mortgage payments or losing your home to foreclosure, it's critical that you build some padding into your budget. Even if it's just a few dollars a month, be disciplined about setting aside cash for that rainy-day fund. If you end up saving enough for six months, funnel that monthly amount toward paying extra principal on your mortgage payment (assuming your mortgage does not have a pre-payment penalty).

If the tough times do hit, and your monthly income doesn't cover your mortgage payments, don't hesitate to use your savings to buy some time. That's what the money is there for - it's better burn those savings than to incur debt or default on your housing payment. Of course, you'll need to anticipate when those savings will run out and decide if you can make the adjustments needed to continue living in your house. If not, you may need to make the difficult decision to jettison the cost of owning a home.

Even if you make the decision to sell, your savings will afford you the time it takes to list and sell a house for full market value, ensuring that you get the most out of any equity you've built in the house. And you walk away without your credit history tainted by a foreclosure or even a delinquent mortgage payment, which puts you in a much better position to buy another house in the future.

Crunch the numbers
Home ownership rewards you with the independence and happiness that comes from owning a tangible piece of property that is yours to enjoy. On top of that, property is a great investment because it appreciates in value over the long term.

But when you're borrowing hundreds of thousands of dollars to purchase property, you need to make sure the financial numbers add up before you move forward. If not, it's possible that you'll lose the chance to ever own the home free and clear, let alone the chance to yield any returns from your investment.

For example, a home buyer using an interest-only loan or negative amortization loan is making monthly payments that aren't even enough to pay down the principal, so the principal either stays the same or rises in the case of a negative amortization loan. That buyer is making the assumption that the home will appreciate in value fast enough to offset the amount paid in interest (plus the additional principal if it's a negative amortization loan).

This gamble may pay off in some super-hot markets with little potential for cooling, but you need to look long and hard at the market conditions before you go out on a limb like that. If the financial basis for buying a house is shaky, you need to be willing to make the tough decision to wait until you're in a better situation to buy or look for a less expensive house.

"Today, most people are buying too much house, just because they could qualify for the loan," Marrs said. "I see desperation buying going on all over the country. People are buying for all sorts of the wrong reasons, just because they want to be in the market."

Shop for the best finance options
Just because you need to be cautious about home financing doesn't mean you shouldn't shrewdly shop around for the best loan options available. In fact, the competition that's been created from the recent housing boom has given many potential home buyers a better chance of finding financing that makes it possible for them to buy a home without sacrificing financial stability.

Investigate the advantages and drawbacks of your different options: adjustable vs. fixed rate and all the sub-options within those two types; the length of term; whether you should pay points to lower your interest rates; and the myriad other options available to today's home buyers.

Shop around with different mortgage companies to see what they offer you. Consult a trusted real estate professional on which of these options they think is best for you. The right loan can save you tens of thousands of dollars over the long term.

This also applies to current homeowners, who should keep a watchful eye on interest rates and consider refinancing if interest rates drop a bit. Even if you're comfortable with your current monthly payment, it never hurts to save money. If you ever get in a tight spot, you'll be grateful that your payments are lower and you can always apply the amount saved toward paying down extra principal.

Anticipate changes and adjust
A lot of life changes occur over the course of the 30 years it typically takes to pay off a mortgage. Many of those changes will have an impact on a homeowner's ability to make the monthly mortgage changes. But if homeowners are prepared for those changes, they should be able to adjust to them and avoid any risk of default or foreclosure.

Adjusting to life changes can often be easier said then done. Unfortunately, many of the most significant life changes occur unexpectedly and don't supply the homeowners much opportunity to adjust. That's why it's important to carefully budget and leave a margin for the unexpected.

Bottom line: the best antidote to foreclosure is promptly paid monthly mortgage payments. These guidelines should help you avoid the possibility of ever defaulting on those payments.

In Default? Know Your Options and Act Promptly to Stop Foreclosure

No one who buys a home intends to miss any mortgage payments. But unexpected life circumstances like loss of a job, death or divorce can quickly stymie the best of intentions.

Consequently, homeowners can't always prevent defaulting on their payments. What's important is how a homeowner in default chooses to respond to their predicament.

Some homeowners respond with inaction. They may acknowledge their default is a problem, but they don't act quickly to resolve the problem. Either they're in denial of the fact that they could lose their home or they're paralyzed by fear of losing their home. As a result, they don't pro-actively seek out the consequences of their missed mortgage payments and what options are available to them. If they do finally decide to act, it may be too late to avoid losing the property at a public foreclosure sale, which the foreclosing lender will conduct to recover the amount owed.

"When people go into default, their first option is to do whatever is necessary stop the default early in the process," said T.J. Marrs, national real estate author, speaker and success coach. "Most home sellers procrastinate and fail to take action early."

Other homeowners overreact. They fatalistically equate missed mortgage payments with losing their right to own a home and look for the quickest way to escape the situation without considering all the options. These homeowners are more likely to fall prey to scam artists who take advantage of their knee-jerk response to the default. In the worst-case scenario, a homeowner could lose the home but still be held responsible for paying off the defaulted loan.

Both of these responses are extreme examples of natural human reactions to a looming foreclosure. But neither of the responses is ideal or helpful to homeowners in default. Instead, homeowners need to adopt a measured response in which they take into consideration all the options available and act decisively before they lose their home.

"People need to begin making some sound decisions about what to do while they still have some options left," Marrs said.

The following guidelines epitomize a sensible response to stop foreclosure.

Contact your lender
Once the due date for your mortgage payment has come and gone, it's only a matter of time before your lender knows you're in default. But don't wait for them to contact you; act preemptively and call them right away. If you leave it up to them, they may not end up contacting you for several months - when it will be much harder to resolve the situation.

When you contact the lender, simply let them know your situation and ask what (if any) suggestions they have. Lenders deal with defaulted customers every day, so they often can provide solid advice. And most lenders aren't eager to expend the money and time it takes to foreclose on a defaulted homeowner, so they're open to other alternatives.

"Don't be afraid to communicate with your lender. If an agreement is made with them, stick to it," Marrs said.

If you reach an agreement with the lender, make sure they provide it in writing so that you're protected if they don't live up to their end of the agreement. And don't rely solely on the lender to act in your best interest. Before you sign anything, have it reviewed by a real estate attorney or local housing counseling agency approved by the U. S. Department of Housing and Urban Development. Visit http://www.hud.gov/ or call 800.569.4287 to find a local HUD-approved housing counseling agency.

Know the deadlines
If you default on your loan and don't work out a plan of resolution with your lender, the lender will take the necessary steps to schedule a public foreclosure auction of your property. In some states the countdown to the auction is less than a month; in other states it is more than a year. In either case it's critical that you understand exactly how much time you have before you lose your home. A tangible deadline will help you set goals and take control of the situation.

"As an investor, the most common mistake I see people make is to wait until it is too late," Marrs said. "The closer the auction, the fewer the options."

Although most states require that the foreclosing lender rigorously attempt to notify the owner of any public foreclosure sale, you shouldn't rely solely on them to do that. When you contact the lender, ask them if and when a public foreclosure sale has been scheduled and up to what date you can stop the sale. Also ask them what you need to do to stop the sale.

The public foreclosure sale is the ultimate deadline, but there are other deadlines incorporated into the foreclosure process that are important. In states with foreclosure proceedings conducted through the courts, homeowners may be asked to appear in court during the pre-foreclosure process. At those court proceedings, a judge will decide if and when a public foreclosure sale will occur.

If you haven't been able to work out an agreement with the lender beforehand, it's crucial that you and an attorney are present at any court proceedings so that you're aware of what is happening and can represent your interests to the court.

Consider Your Alternatives
Although the options are limited, homeowners in default have several viable options to stop the foreclosure process. Not all of these options will work for every homeowner, but all homeowners should consider the advantages and disadvantages of each option and determine which is best for them.

Balance your budget
The core issue forcing homeowners into default is a lack of cash available to pay the mortgage. There are two ways to obtain more cash for the mortgage payment: spend less in other areas or find a way to increase monthly income. Even if you think you've already considered and pursued these options, it's important to take an honest and disciplined look at your budget to double check for any areas of improvement.

Because money is so tight, most homeowners in default aren't living lavishly or spending money frivolously. But you should go beyond that and carefully document your family's everyday spending over the course of a week or two. You may find additional areas that can be cut. In addition, make a list of all your monthly bills and prioritize them. If some of the bills on that list are for luxury products or services, you should seriously consider discontinuing them.

"Look at other assets which could be liquidated to keep the mortgage payments current. Late mortgage payments will negatively affect credit more than just about anything," Marrs said. "Let your car payments go behind before the mortgage is left unpaid."

On the flip side, look at alternative sources of income. Many people fall into default on their mortgage due to the loss of a job. If you're capable of working, consider finding a temporary job or two - even if you're overqualified and the jobs don't pay well - to cover some of your expenses while you're looking for long-term, higher paying employment.

You could also look for a short-term source of income, such as a credit card, friend or relative to pay back payments and fees. But do this only if you have a good chance to pay that borrowed money back quickly and you're in a position to stay up-to-date on your mortgage payments going forward, according to Marrs.

"I'm not suggesting rob Peter to pay Paul. Only do this if the reason which caused one to get behind has been essentially rectified," he said. "For example, the homeowner lost a job a few months back and is now back to work, but is too far behind to catch up all at once."

Restructure payments
All your spending cuts and temporary income sources may not be enough in the face of the devastating circumstances that usually cause foreclosure. If that's the case, you need to appeal to your lender to provide some relief in the form of a restructured payment plan.

Each lender deals differently with defaulted homeowners, but some will offer alternatives that lower your regular monthly payments and allow you to pay back any defaulted amount over time. Remember, it costs the lender thousands of dollars to foreclose on your property, so you may have some wiggle room in negotiating restructured payments with them.

"In some rare instances one might work out a forbearance agreement, whereby the defaulting homeowner pays the bank some money now, and then pays the back payment over the next few months," Marrs said.

Once again, get any restructured payment agreement in writing from the lender. And read it carefully so that you clearly understand the terms of the agreement and the consequences if you don't abide by the terms.

Refinance loan
You might save even more on your monthly payments by refinancing or taking out a second mortgage. Shop around for the best loan options. Depending on the balance and length of term, you may be able to realize much lower monthly payments through a refinancing.

"The more equity you have the easier it will be getting the loan or possibly even a second mortgage," Marrs said.

Ask your own lender first if they would be willing to refinance the loan. They might have special offers for current customers. Compare the terms they offer to other lenders. If you use another lender, make sure all the paperwork will be done in time to stop the foreclosure sale. The foreclosing lender may be willing to postpone the foreclosure sale if you demonstrate that you are taking steps to resolve the situation.

Sell the property
This probably isn't your first choice, but if you're not able to stop the public foreclosure auction any other way, it's a choice you should make as long as you don't owe more than what the property will sell for on the market. By selling pre-foreclosure, you'll be able to keep the foreclosure off your credit history and walk away with some money to show for your equity.

"If you let things get too far behind, it will cost more in terms of higher interest rates and negative credit ratings than what you might be saving by holding on to bad deal," Marrs said.

Inform your lender that you are listing the property for sale to pay off the amount owed to them. Ask the lender if they will postpone the foreclosure sale to give you enough time to sell the property for a reasonable price. Even if the sale is postponed, you'll probably be under a time crunch to sell the property. That's why it's important to make this decision early on in the process.

"If the auction date is getting very close, one may consider selling to an investor who can quickly close and clear up the primary problems, or hire a realtor if they can demonstrate they can sell quickly," Marrs said, adding that some investors may allow homeowners to continue to live in the property and lease it after the property is sold.

"One may consider working with a reputable investor, whereby they purchase property, then lease property back to you with an option to buy," he said. "Work out whatever equity split arrangement seems appropriate."

Marrs cautioned homeowners to carefully review any such arrangements to ensure they are getting a fair amount of the equity and that they are relinquished from any liability for their mortgage debt. If so, this arrangement can be beneficial for the homeowner.

"Remember it is better to have half of something than zero of nothing. If it goes to the auction, you could end up with nothing plus the poor credit to live with for the next 10 years," Marrs said.

If you decide to sell your home on your own, market it well to get the best price possible. Thanks to the increased use of the Internet by consumers looking for a home, you can gain a lot of exposure by listing your property online. Sellers will soon be able to post a property on RealtyTrac, the fourth-largest real estate website with more than 2 million monthly visitors.

Deed in lieu of foreclosure
This simply means you transfer ownership of your property to the foreclosing lender in order to stop the foreclosure proceedings. It's really a last resort for homeowners and should only be used if none of the other options, including selling your house, work.

You'll still walk away with nothing to show for the property, but most homeowners who choose this option don't have any equity in the property anyway. The advantage is that your credit won't be as badly damaged.

Fully investigate every other option before you decide to opt to deed your property to the lender in lieu of foreclosure.

Consult a real estate professional
Whether you decide to restructure your payments, refinance, sell or deed the property in lieu of foreclosure, you should enlist the help of a local real estate professional - such as a real estate agent or attorney - to guide you through the process.

Many homeowners in default don't have the money to pay an attorney and don't want an agent's commission to eat away at any profit from a home sale. But keep in mind that just an hour or two with an attorney may be sufficient to ensure that you're avoiding any pitfalls in the process. And a good agent will give you solid advice even if you can't afford to have them list your home. They know that if they help you out now, you're more likely to use them the next time you buy or sell a home. And they know you're more likely to refer them to a friend.

Be wary of scams
If you need to refinance your loan to help you stop the foreclosure, there are reputable lenders out there who can help you out. And if you decide to sell your home before the foreclosure sale, there are qualified buyers and investors looking to buy, and reliable real estate agents able to assist you. You need these people to help you avoid losing the house at public foreclosure auction.

But some people take unfair advantage of homeowners in default. These scammers will promise to help you but will only leave you in a worse mess than you started. According to HUD, the most common scams are Equity Skimming and Phony Counseling Agencies.

In an equity skimming scam, you will be approached by someone who promises to pay off what you owe to the foreclosing lender if you hand over ownership of your property, usually through what's called a Quit Claim Deed. Once you're out of the house, the new owner rents it out for a few months and never pays off your mortgage, causing the lender to foreclose. You end up with a foreclosure on your credit history and with little or nothing to show for any equity you had built in the property.

Phony counseling agencies contact homeowners in default and offer help for a fee. Once they have your money, they may not do anything for you. If they do help you, it will be by contacting your lender or suggesting that you sell your house - tasks you can do on your own.

On its website, HUD suggests the following precautions to avoid scams:

• 1. Don't sign any papers you don't fully understand.
• 2. Make sure you get all "promises" in writing.
• 3. Beware of any contract of sale or loan assumption where you are not formally released from liability for your mortgage debt.
• 4. Check with a lawyer or your mortgage company before entering into any deal involving your home.
• 5. If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer by contacting the state's Attorney General, State Real Estate Commission or the local District Attorney.

"Whomever you deal with, get some references," Marrs said, adding that he teaches investors that credibility is everything. "Certainly try to work with someone who is a reputable and can back it up. Do this whether dealing with an investor or real estate agent. There are performers and non-performers in every profession."