Many homes in the last few years were purchased or refinanced with adjustable-rate loans. These allow the buyer to pay only the interest, or less, for a set period of time, after which the loan interest rate re-sets at a higher rate.  For many borrowers, this initial period of time is now coming to an end. Rates are increasing and causing monthly payments to become challenging or even unaffordable.  Refinancing to lower the payment may be difficult, as home values are decreasing in many areas. If you are having trouble making your mortgage payment, here are some key things to keep in mind:

1. It is vitally important for you to request a financial consultation through your Employee Assistance Program if you are experiencing difficulty now, or anticipate problems meeting your expenses in the near future. Getting a financial consultation can help you identify areas in your budget where you can reduce expenses in order to make your mortgage payment and make trade-offs that can prevent problems later, as well as enable you to make an informed decision regarding the options available to avoid foreclosure, if needed.

2. In many cases you can work things out with the lender directly. Contact the lender as soon as you know you will be having trouble keeping up with your mortgage payment. Generally, the lender will not work with customers to offer alternatives to foreclosure, such as modified payments, extended contracts, etc., until they have missed payments.  However, it may be good to call ahead of time to communicate with the lender and show your good faith.

When calling your lender to negotiate additional time or a modified payment plan, rather than asking for the lender’s Collection Department, ask to speak to the lender’s Loss Mitigation Department to do a “work-out” plan. A “work-out” plan will be your way to get back on track with your payments, with your lender’s cooperation. Talking to the lender’s Collection Department may not be as helpful; their job is to collect the full payment to bring the account current, without offering opportunities for a “work-out.”

3. If you are having trouble communicating effectively with your lender, contact a Housing and Urban Development (HUD) approved housing counselor.   Housing counselors can help you understand the law, organize your finances, and represent you in negotiations with your lender, if needed. To find a HUD-approved housing counselor near you, call (800) 569-4287 or TTY (800) 877-8339, or check HUD’s website at www.hud.gov. 

4. Avoid foreclosure prevention companies. They will charge you a hefty fee (often the equivalent of two or three months of your mortgage payments) for information and services your lender or a HUD-approved housing counselor will provide for little or no cost.

5. Be aware of foreclosure recovery scams!  Never sign a legal document without reading and understanding all the terms.  Always refer to an experienced real estate attorney or HUD counselor when considering a foreclosure recovery group and check them out with the BBB (Better Business Bureau) at www.bbb.org.

6. If you are considering bankruptcy, be sure and get advice from a qualified attorney.  Keep in mind that bankruptcy will not allow you to keep your house for free. It will assist in helping you deal with any unsecured debt that you have as a result of a foreclosure action or repayment. Further, it could help you to get on track with past due or delinquent payments to keep you in the mortgage and in your home.

If You Can No Longer Afford Your Home

If you cannot afford to keep your home, discuss these possibilities with your lender:

• Sell the home: If you are behind on your mortgage payment and you can no longer afford your home, your lender will usually give you a specific amount of time to find a purchaser and pay off the total amount owed. You will be expected to use the services of a real estate professional who can aggressively market the property. If you need to sell your home, you'll have to answer many questions. You'll need to find how much your house is actually worth, and you'll have to find a real estate agent you feel can sell the home within the amount of time allowed by the lender.

• Pre-foreclosure sale or short payoff: If you can't sell the property for the full amount of the loan, your lender may accept less than the amount owed. Financial help may also be available to pay other lien holders and/or help toward some moving costs. You may qualify if:

1. The loan is at least two months delinquent.
2. You (or your real estate professional) can sell the house within three to five months.
3. A new appraisal (obtained by your lender) shows that the value of your home meets HUD program guidelines.

• Assumption: A qualified buyer may be allowed to take over your mortgage, even if your original loan documents state that it is non-assumable.

• Deed-in-lieu of foreclosure: As a last resort, you "give back" your property to the lender, and the debt is forgiven. This will not save your house, but it is less damaging to your credit rating. This option might sound like the easiest way out, but it has limitations.  You usually have to try to sell the home for its fair market value for at least 90 days before the lender will consider this option.  This option may not be available if you have other liens, such as other creditor judgments, second mortgages, IRS or state tax liens.  The foreclosure process allows the lender to clear the property’s legal title of these other notes and liens.

• Foreclosure:  This is where the lender will repossess the home through a legal action to clear the property’s legal title and allow them to re-market the property to attempt to recuperate any loss from having to take title back on a property.  

IRS Considerations

The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.  Speak to your lawyer or financial advisor or go to Home Foreclosure and Debt Cancellation on the IRS website.

Help for Military Personnel

The Servicemembers Civil Relief Act of 2003 limits interest that may be charged on mortgages taken out by a servicemember (including debts incurred jointly with a spouse) before he or she entered into active military service. At your request, lenders must reduce the interest rate to no more than 6% per year during the period of active military service and recalculate your payments to reflect the lower rate. This provision applies to both conventional and government-insured mortgages.  The Act applies to active-duty military personnel who had a mortgage obligation before enlistment or before being ordered to active duty.

This includes:

• Members of the Army, Navy, Marine Corps, Airforce, Coast Guard.

• Commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration engaged in active service.

• Reservists ordered to report for military service.

• People ordered to report for induction (training) under the Military Selective Service Act.

For Guardsmen called to active service for more than 30 consecutive days: in limited situations, dependents of military personnel are also entitled to protections.  For more information see the Housing and Urban Development (HUD) website at www.hud.gov/offices/cpd/about/hudvet/library/scra.cfm.

Pick Up the Phone

The good news is that lenders want to help borrowers keep their homes. Foreclosure is expensive for lenders, mortgage insurers, and investors.  Now more than ever, it is important to get advice and help. 

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The information presented is not to be a substitute for seeking advice specific to your situation from a tax, legal or financial professional.  If tax, legal or financial advice is required, contact a tax specialist, attorney or financial advisor.

© CLC Incorporated

Reviewed 07/10