In times of crisis, housing and food should be our two top priorities; however, in light of the severe loss of income millions of Americans are suffering right now, the fear of foreclosure is real. The good news is that unlike the 2008 financial crisis, banks typically aren’t foreclosing to cover their losses. In fact, many of them are offering mortgage assistance programs.
Foreclosure and the CARES Act
The Coronavirus Aid, Relief and Economic Security Act, which Congress passed March 27, 2020, provided temporary relief for most homeowners by placing a moratorium on foreclosures for mortgages backed by Fannie Mae and Freddie Mac (mortgage giants that back about half the U.S. housing market) and even extended the original deadline of May 17 to June 30. In addition, the Department of Housing and Urban Development (HUD) said that it, too, would suspend foreclosures and evictions for borrowers with mortgages insured by the Federal Housing Administration.
What happens after the coronavirus-related relief measures expire?
Even after the foreclosure moratorium expires, it doesn’t mean foreclosure is inevitable. Most lenders offer a grace period of seven to 15 days to pay your bill before the payment is considered late. But even after the grace period has passed, lenders generally give you 30 days to make up for a missed payment before reporting it to the credit bureaus. Once reported, a missed payment can reduce your credit score by as much as 110 points. But foreclosure proceedings don’t start until you’re at least 120 days late on a payment.
So, if you’re struggling to pay your mortgage, you still have time to strategize before your home is repossessed. However, you have to act fast — especially if you’re already behind on payments. (If you haven’t missed a payment yet, but think you will, contact your lender right away). Taking these steps can help you reassess your finances and reduce your risk of foreclosure.
To avoid foreclosure, prioritize your mortgage payment
If you’re struggling to make your mortgage payments, it’s time to take a close look at your monthly spending. Print out your monthly checking account and credit card statements and highlight all the expenses that can be eliminated, including entertainment subscriptions and home maintenance services. Reach out to your local utilities to see if they offer payment plans or discounts for people experiencing financial hardship. You can also consider consolidating consumer debt, which could help you put more money toward your mortgage. If you’re still falling short after cutting back in every way you can, prioritize your mortgage over other loans, including credit cards, to avoid putting your home at risk.
Refinance your mortgage
If you have steady income and your house isn’t underwater, you might be able to refinance your mortgage and secure a lower monthly payment. Calculate the equity you’ve built up in your home and check current interest rates to see if you can get a better deal. Lower rates or a longer-term mortgage might make your payments more manageable.
Negotiate with your lender
As soon as you realize you’re going to miss a payment, contact your lender to negotiate a loan modification or a temporary payment plan. You’ll probably get better results if you reach out before a late payment — and if you can show that you’ve tightened your belt in other ways. Remember that your lender will most likely ask you to sell any other assets you own before it will reduce your monthly payments, so go into the negotiations prepared to put all your cards on the table.
Speak to a professional about avoiding foreclosure
The world of mortgage finance can be a bit intimidating, but a trained professional can help you understand your options. “There are a number of programs that came about from the 2008 recession,” says Michael Bovee, a debt relief expert and co-founder of debt relief company Resolve. “Talk to a loan service provider about any and all opportunities.” For instance, the U.S. Department of Housing and Urban Development (HUD) funds several initiatives aimed at helping homeowners avoid foreclosure, including the Making Home Affordable Program. This program offers several alternatives for homeowners who are unemployed or have mortgages that are underwater. The Home Affordable Modification Program, for example, could reduce your monthly mortgage payment by as much as 40%.
Getting help doesn’t have to be expensive. A free or low-cost HUD-approved counselor can help you apply for assistance, organize your documents and negotiate with your lender.
Sell your home
If your house is worth more than you owe (after closing costs), selling it can help you avoid foreclosure and keep your credit intact. If your mortgage is underwater or upside down, meaning you owe more than your home is worth, you may want to consider a short sale or a deed in lieu of foreclosure. In these agreements, your lender will take your house and forgive the mortgage balance, even though the house is worth less than the outstanding loan. This means the lender has to take a loss, so you’ll need to be prepared to explain why you can’t make the agreed-upon payments. Lenders generally need you to explain the cause of your financial hardship before they’ll consider a short sale.
If you can’t come to an agreement with your lender, you may want to consider filing for bankruptcy, which will “stop a foreclosure in its tracks,” Bovee says. If you have a steady income, Chapter 13 bankruptcy could allow you to stay in your home.
During bankruptcy proceedings, the court will approve a monthly budget and a repayment schedule, and appoint a trustee who will make sure you stick to the plan. This approach handcuffs you financially and makes it difficult to get a credit card or purchase a car. But Chapter 13 bankruptcy is deleted from your credit report in seven years — the same amount of time a foreclosure stays on your record. And sometimes it’s the only way to avoid losing your home.
Whatever path you take, remember to stay calm and collected. There are plenty of sharks and scammers looking to take advantage of desperate homeowners who want to avoid foreclosure. Take the time to learn about your options and get professional advice before you make any big decisions about your home.