If you're facing foreclosure, the sooner you hook up with a HUD-approved housing counselor, the better. These counselors work for free (they are paid through government grants and in some cases grants from major mortgage lenders who really do want to avoid foreclosures if at all possible) and are well trained in the various foreclosure-prevention programs and techniques of negotiation. You can have no better advocate if you are trying to avoid a foreclosure or negotiate a mortgage modification.
As the number of foreclosures continues to rise, some counselors find themselves swamped. You may not get your calls returned promptly—or returned at all, in some cases. Be patient. But if you do run out of patience at some point and decide to handle your own negotiations, first understand that most of the major mortgage servicers have signed up to participate in the government Making Home Affordable programs. Before you strike out on your own you’ll want to get a good understanding of what those programs are and whether you qualify.
Once you call your servicer, it will probably send you a “workout package” of forms, along with some information about your options. After you fill out and return the forms you can talk about possible arrangements.
The servicer will have some discretion to make deals, but will have to contact the lender for anything out of the ordinary. For example, say you are three months behind on your mortgage because you were laid off, but you are now back at work and can make up the missed payments over six months in addition to meeting your current obligation. Most mortgage servicers have authority to sign off on this kind of short-term arrangement. But if you needed two years to make up the missed payments, the servicer might have to get permission to make a deal.
If your servicer is not responsive to your attempts to work things out, contact your lender directly. If you don’t know who your lender is—which is quite common due to the rapid changes in the marketplace—you can find out from your servicer. The servicer is required by law to give you that information—and you can sue if they don’t.
Can a HUD-Approved Housing Counselor Always Help You?
Housing counselors can do a lot, but they are limited by mortgage servicer and lender policies regarding what are termed loss mitigation measures.
If you’ve missed a payment or two but haven’t received a notice of intent to foreclose (or something similar), you have a decent chance of working something out with the help of a counselor or with the servicer directly. You may be able to keep your house, and perhaps get a more affordable mortgage payment for the future.
If you are way behind on your payments (four or more months) and have already received a notice of default (in states that require them) or even a notice of sale, your chances of working something out aren’t very good. At this point, the servicer is unlikely to consider you a good candidate for keeping current in the future, whatever your payments may be.
What Happens When You Contact a HUD-Approved Counselor
When you call a HUD-approved counselor, you will be scheduled for an interview (by phone or in person) that will probably take between 60 and 90 minutes. The counselor will want to get a handle on your income, your debts, your property, your mortgage, the value of your home, and what kind of arrangement you think you can live with. You likely will need to do some homework before your appointment.
From the information you provide, the counselor will categorize your situation as easy to resolve, needing some serious negotiations to keep you in your house, or as something that can’t be solved by working with the servicer.
If Your Case Is Easy to Resolve
You have missed only two or three payments because of a temporary economic setback through no fault of your own, and you can show that you’ll be able to make your payments in the future.
The counselor will call a dedicated loss mitigation hotline made available by your mortgage servicer and get an okay to a workout on the spot. Typically, you’ll get an agreement that lets you make up the missed payments over a period of between three months and a year, depending on your situation. Or the agreement may add the missed payments to the end of your mortgage.
It’s hard to generalize about how long it takes to get an agreement in your hand if your case looks like an easy one to the counselor. It all depends on the volume of cases being negotiated by your counselor and lender, and the priority assigned to your case.
If You Need Serious Negotiating Help to Keep the House
You have missed three or four payments and are on the verge of receiving a notice of intent to foreclose or even a notice of intended sale. If you’re going to be able to make future payments, you need some type of modification of your mortgage principal or interest payment, and you need a way to deal with the missed payments.
You and the counselor will try to come up with a proposal you can live with. It may involve an agreement on your part to give up some expenses (for instance, eliminating satellite TV, pulling your children out of private school, or suspending contributions or repayments to a retirement plan) in exchange for the lender’s agreement to make the changes in your mortgage that will make it possible to stay in your house.
The foreclosure counselor will communicate your proposed workout to the mortgage servicer, and the servicer will pass it on to a special analyst (employed by the servicer) to see whether or not the lender will accept it. There will probably be some negotiation, with your counselor advocating for your position or something close to it. Depending on whether the servicer’s right hand knows what its left hand is doing, you may receive a notice of default or a notice of intent to begin foreclosure proceedings even while negotiations are still going on.
As the time of a threatened foreclosure draws near, you may start to panic at the lack of movement in your talks. If you get within a couple of weeks of a scheduled sale without finalizing an agreement, you should start talking to a bankruptcy lawyer to see whether bankruptcy would be an appropriate way for you to stop the foreclosure sale and give you more time to work something out.
If The Only Way to Avoid Foreclosure Is to Sell or File for Bankruptcy
You have received a notice of intent to foreclose and either you are unlikely to have enough income to stay current on your payments (even if they are reduced, and even if you could reduce your overall debt load by filing for Chapter 7 bankruptcy) or you have a poor credit score.
Your counselor will probably tell you that a satisfactory workout isn’t going to happen and that you should do whatever you must to avoid foreclosure, which would likely put a heavy hit on your credit score. The counselor will likely suggest unloading your house in a short sale (which usually means selling it for less than you owe on it) or offering a deed in lieu of foreclosure to the lender (giving the house to the lender in exchange for a promise not to sue you for what you still owe on the mortgage).
Some counselors might suggest that you consult a lawyer about the possibility of filing for bankruptcy. Many, however, avoid the “B” word if at all possible, because the lenders (in many cases their funders) don’t like it. I don’t think foreclosures are always a bad thing, and I do think that bankruptcy is sometimes the most appropriate response. For example, a short sale might be marginally better for your credit record in the future (no one really knows these days), but you would have to leave your house much sooner than you would if you let the foreclosure happen. And that means you would give up your opportunity to save money by staying in your house for months—perhaps many months—without making payments. Finally, if you choose a short sale over bankruptcy, you might be sacrificing the best way out of liability for income tax on debt the lender writes off and for deficiencies. So keep in mind that a counselor who attempts to sell you on a short sale or talk you out of bankruptcy may be passing on the views of the lenders and servicers, which may not best serve your economic interests.
If you still want to keep your home despite the fact that the counselor tells you a workout is not in the cards, it’s time to think about bankruptcy. Filing for Chapter 13 bankruptcy might let you keep your house. (See our article on keeping your house with Chapter 13 bankruptcy.) At this stage, filing for Chapter 7 bankruptcy won’t keep you in your house in the long run, but it can help you stay there payment free for an extra couple of months. (See our article on delaying your foreclosure with Chapter 7 bankruptcy.)