If foreclosure looms because you've missed some mortgage payments—or you think you’ll fall behind soon—it's time to face a difficult question: Should you try to keep your home or let foreclosure happen?
Apart from the emotional considerations that come up whenever a foreclosure is threatened, certain economic factors exist that you shouldn’t ignore. Before you can decide whether to try to keep your house, you need to evaluate your financial situation, which has no doubt changed since you bought your home.
Here are the three questions you’ll need to answer:
Your answers to these questions about your equity and your budget will largely determine whether or not you should try to hold on to your house.
If you have equity in your house and are facing foreclosure, it might make sense to try to hold on to the property if for no other reason than to protect your equity. Generally, your equity will be the difference between what you owe on the house and what you can sell it for.
Estimates of real estate values are traditionally based on the amounts that similar houses in the neighborhood (called “comparables” or “comps”) have recently sold for. To find comparables in your neighborhood, go to Zillow or a similar website. Local real estate brokers and agents can also give you an estimate of your home's value by looking at similar sales in your neighborhood.
If you have some equity in your house, it could be worth it to try to keep your house—if you think you can afford future monthly mortgage payments. If you can't afford the payments, it might make sense to sell the home and try to get out from under the loan.
It’s not uncommon for people to pay 50% or more of their gross (not take-home) income toward their overall mortgage debt. That leaves little or nothing left for food, utilities, transportation, out-of-pocket medical costs, and the like. Quite simply, this economic position is unsustainable.
There is no point in putting time and effort into trying to hang on to your house if you really, truly can’t afford it, like if you’ve lost your job and don’t think you can find a one that pays a similar amount. Here’s how to think about whether or not you can afford your current loan.
Conventional wisdom is that you shouldn’t pay more than around 25-28% of your gross (pre-tax) income on your mortgage. So, if you make $55,000, which is roughly $4,583 per month, 28% of that amount comes out to about $1,283. This means you shouldn't spend more than about $1,283 on your monthly mortgage payments. If your income is $75,000 a year, your first mortgage payment (including tax and insurance) shouldn’t be more than about $1,750 a month.
Of course, these percentages and figures are just a rule of thumb. In terms of deciding whether your home is affordable as a factual matter, there may be times when these figures can be disregarded. If you have a child with special needs or two kids in college, your mortgage payment might not be affordable even if it’s below these thresholds. Though if you have few other expenses—like if you live simply, don’t own a car, and grow some of your own food—you might be able to afford a mortgage payment that is a higher percentage of your income.
If you determine you can't afford the payments, but still want to try to keep the home, see if you can reduce your debt load so that you can afford the home.
If you don’t have enough cash each month to keep making your existing mortgage payments and pay for other necessities, there are a few ways that you might be able to make the payments affordable. Basically, you need to either get your hands on more cash or get the mortgage payments reduced.
Create a budget. You can take a no-nonsense look at your income and expenses and see what expenses you can trim. If you don’t know where to start, as you might guess, lots of websites offer budgeting software and spreadsheets. Also, HUD-approved housing counselors can typically provide budgeting help to people trying to save their homes from foreclosure.
Lowering your mortgage payments. Almost most all lenders offer “proprietary” (in-house) loan modifications to eligible borrowers who are struggling to make mortgage payments. If you have a Fannie Mae or Freddie Mac mortgage, you might qualify for a Flex Modification. Or, if you have a FHA-insured loan, you’re entitled to a special loss mitigation process and you might qualify for a modification that way.
Filing for bankruptcy. You can consider filing for Chapter 13 bankruptcy and come up with a repayment plan that will let you reduce the amount of your monthly payments on your other debts and get rid of them altogether in three to five years. If you file for Chapter 7 bankruptcy, you can get rid of your unsecured debts, like those from credit cards, medical services, or signature (personal, unsecured) loans, so you’ll have a greater share of your income to devote to your mortgage.
If you decide that it no longer makes sense to keep your home, keep in mind that doing so may make things much easier for you and your family in the long run. Also, if you decide to let the foreclosure proceed, you will probably be able to stay in the house for months (in many states) without making any more mortgage payments, giving you time to save some money to move and secure new housing.
If you have questions about how long a foreclosure typically takes in your state or foreclosure procedures in general, consider talking to a foreclosure attorney. If you’re considering filing for bankruptcy, consult with a bankruptcy attorney to find out if that's a good option for your situation. If you need help planning a budget or want information about foreclosure avoidance options, like modifications, short sales, and deeds in lieu of foreclosure, contact a HUD-approved housing counselor.