Foreclosure doesn’t usually come as a big surprise to homeowners. You probably know, well before it happens, that you’re going to have trouble making your mortgage payments. Maybe you’ve been laid off or face unexpected medical bills, or maybe that adjustable-rate mortgage you took out a couple of years ago is scheduled to reset at a much higher rate, making payments out of reach.
Once you do fall behind, you’ve probably got a few months before your lender even starts the foreclosure process. The fact that foreclosure is a process—sometimes a long one—is good news for you. You don’t need to panic. You’ll have time to plan, negotiate, and evaluate your options—if you act as soon as you smell trouble coming. The more time you have, the better.
If your only problem is a few missed payments, your lender will probably be willing to let you get current over time or even add the missed payments to the end of the loan. If you’ve missed four or five payments, your lender may not be flexible—but you still may be able to work something out.
If you're likely to lose your house sooner or later, your failure to immediately face this reality may cost you thousands of dollars. Here's why: Any mortgage payments you make now will do you no good if you end up losing your house in foreclosure. Assume your mortgage payment is $2,000 a month and you scrape together enough money each month to pay your mortgage because you don't want to lose your house. If $2,000 is way more than you can afford even in the short term, it's inevitable that you'll start missing payments. If you start missing payments six months down the road and you end up in foreclosure anyway, the payments you scraped together during that six-month period will have been for naught unless you somehow find a way to get current on your mortgage payments or you file and complete a Chapter 13 bankruptcy. On the other hand, if you stopped paying your mortgage six months ago when you first realized that holding on to your house was a lost cause, you would now be $12,000 in the black.
Don’t wait for the lender or loan servicer to contact you. Just as soon as you realize you’re going to have trouble making your mortgage payments, you can and should start working on the problem. (Look on your monthly mortgage statement or payment coupon book to find contact information for your lender or servicer.)
Houses are expensive—that’s why most homeowners pay for them over 30 years, one monthly payment at a time. And it’s not uncommon for people to find they just can’t afford to keep making the payments. If you lose your job, get divorced, or face unexpected medical bills, keeping current on your house payments may be next to impossible.
Life events like these aren’t the only reason for foreclosures. Many homeowners—about 34 million U.S. households, or roughly one-third of the nation—took money out of their homes in 2004 through 2007 by refinancing or borrowing against their equity, increasing their debt load. Many people who bought when prices were high got nontraditional mortgages (interest-only payments or adjustable rates with ultra-low teaser rates at the start), expecting to refinance or sell at a profit later. Others were encouraged by mortgage brokers (with a wink and a nod) to overstate their income, also with the expectation that rising prices would make the misstatement irrelevant. But because lenders have tightened credit, it’s no longer easy to refinance a mortgage, even with a good credit history.
Meanwhile, the interest rates on many adjustable rate mortgages are set to move higher, making monthly payments soar beyond the ability of many homeowners to make them. And increasingly, selling their homes is not an option for these homeowners because of the slump in residential market values.
Don’t panic—and don’t get scammed. Foreclosure rescue scams have popped up all over the country in response to the soaring foreclosure rate and the new government programs that offer various types of mortgage modifications. Almost without exception you will be worse off with these scams than if you let the foreclosure go through. To find out how scammers work and what to look for, read our article Don’t Lose Your Home to Foreclosure "Rescue" Scammers.