Debt Free

Foreclosure; It’s a growing problem in the U.S. right now. This morning RealtyTrac reported that foreclosures are up a stout 115%, year over year, for August. Foreclosure numbers have been growing for some time now. In August, 2006 they were up 63% year over year, from 2005. In addition the growth rate of foreclosures is growing, with the foreclosure rate for August up a robust 36% over July’s numbers. That’s a problem, folks. It’s not just the fact that it could bring about a severe problems with the housing market, which it could easily do. The greater problem is that so much of economy in the past decade has been supported by the housing industry and financed by real estate debt.  If there is even a mini collapse, we could be in for a bumpy economic ride for a few years.

If you’re facing foreclosure, or fear it could be in your near future, you must avoid foreclosure at all costs. It’s even more important to avoid foreclosure, than it is to keep your home, although both would be nice. Too many people put off the inevitable, thinking it will go away, because they’re paralyzed with fear, or are suffering from analysis paralysis. Get on the stick, people! Foreclosure will impact your credit, and not in a positive way, either. It will dramatically hurt your credit for 7 years. That’s a hell of a long time to have compromised credit. This is especially true in light of tightening credit markets. Interest rates for those with blemishes on their credit, if they can get loans at all, will be dramatically higher than for those with great credit.

So, what can you do if you’re one of those in this pickle? There are 4 broad strategies you can use to avoid foreclosure; pay your mortgage current, sell your home before it falls into foreclosure, rent out your home, and mortgage modification.

1 - How to Avoid Foreclosure – Pay your mortgage current. This is a great solution if you can do so. Unfortunately, it’s often the most problematic. After all, if you could just pay it current, you wouldn’t be in a default situation now.

2 – How to Avoid Foreclosure - Sell your home. This is often tried by many as a strategy for foreclosure avoidance. The problem in many real estate markets is that real estate values have tumbled by 5% - 25%. Too many people are unable to sell their house for what they owe on it. In addition, there is a backlog of homes on the market, and it’s taking longer and longer to sell.

This is the crux of the whole foreclosure problem. Not to preach, but too many people grabbed mortgages they shouldn’t have, purveyed by brokers and lenders with the institution’s (and their own) short term interests at heart, instead of the long term health of the creditor, the lender, and, ultimately, the economy. That was compounded by too few people refinancing into a more favorable long term mortgage product before disaster struck. Now it’s not as easy to refinance, and to many people are stuck in a home that’s worth les than they owe, in a tight credit market, with a mortgage that’s adjusted into one they can no longer afford.

There are options for selling outside the traditional real estate market. No doubt you’ve seen the signs posted to telephone poles throughout the land, like posters for some sick circus, announcing “I’ll Buy Your Home For Cash!” These are typically the taglines of foreclosure investors. Unknown to some, these amateurish, handwritten sighs are, in some cases, actually put up by huge, national corporations. In other cases they are nailed up by small time investors that will purchase pre-foreclosure homes for cash. Either way, going with one of these operations is a better option than having your house foreclosed upon by the lender. You’ll get to retain some of the equity in your home if you have any, and keep a foreclosure mark off your credit. The downside is that typically the investor will only give you a percentage of market value for your home. On the other hand, if market values keep sinking, as they are in some locales, if you wait a few months, the investor’s offer may be right on target!

Therein lays another problem. If you are upside down in your home now, you need to get the maximum sales price you can. You are already going to have to cut a check to the bank for the difference between the selling price of your house and the payoff balance of your mortgage. If you haven’t the cash to do that, you’re in a spot o’ trouble.

3 – How to Avoid Foreclosure – Rent your home to others. If there’s a brisk rental market in your area, you may consider renting. The cash you receive for the deposit and first and last month’s rent may cover your arrears with your mortgage lender. If the market is strong, the monthly rental payments may cover your mortgage payment and even leave you with cash to spare. Even if they don’t quite cover your mortgage, the total of your apartment rental (you’ve got to live somewhere until everything gets back on the up and up) and the rental shortfall may still be less than your mortgage payment. This will obviously improve your monthly cash flow.  Remember though, you’ll still be on the hook for insurance and maintenance, although you will receive some tax benefits as a landlord.

Look at the rental rates for similar properties in your area. Make a budget and include all the costs associated with renting your property. Use this to estimate your monthly cash flow and determine if renting your property is a valid solution to your problem. If you do decide to rent out your house, make sure you screen your tenants. Run a credit check and use an appropriate screening service to check the prospective tenant out thoroughly. You don’t want your money problems to go from bad to worse by having a meth lab or some other criminal enterprise operating on your property. One last thing; don’t forget to check the landlord – tenant laws in your area. Make sure you abide by all these in your foray into being a landlord.

4 – How to Avoid Foreclosure – Mortgage Modification. This may be the best way to go for many. The key here is to be proactive. Call your mortgage company before your mortgage goes into default if you see a problem on the horizon. If they send you letters demanding payment, or statements indicating your loan is about to go into default, for God’s sake, don’t ignore them! Now’s your best chance to take action to save your home, but act you must.

Most lenders really don’t want your house, they’ve got bigger problems to deal with, especially now. They’d rather have some cash flow and another good loan on their books. Their loan portfolio probably looks bad enough already. You may be unaware of this, but Fannie Mae and Freddy Mac, the largest mortgage paper purchasers, and many other investors, actually require lenders to try hard to work things out with you. It makes good sense, investors don’t make any R.O.I with a portfolio full of bad loans and foreclosed properties. You, however, must be aggressive. You will be in a much better position to stave off foreclosure if you are less than 2 payments behind on your mortgage, so get things done before things get that far. Make sure you document all your efforts, and when calling your lender have all your information ready. They’re going to want to see proof of any financial hardship, so have it ready for them.

The bottom line is that you should call your lender at once, before things go too far, to make alternate arrangements for your mortgage. You may even be able to get them to agree to actual mortgage modification, where they’ll change the terms of your mortgage to help keep you from foreclosure. Unless you try, however they won’t go the extra mile. You can also check with the FHA to see if you are able to do what’s termed a partial claim. In a partial claim you get a one time, interest free loan from your loan guarantor to bring your mortgage current. To qualify, you must have an insured mortgage, such as an FHA loan, and be 4 – 12 months behind in your payments, without already having lost your home to foreclosure.

Some other things you should do to keep foreclosure at bay: Make a budget. Stop paying other bills if you absolutely have to. That’s a last resort, but it may help you keep your house. If you really have dire financial problems, your credit cards are unsecured, your mortgage is secured by your house. Not paying your credit cards will mess up your credit, but you’ll still have a roof over your head and credit card default will not stay on your credit as long as a foreclosure. That is a very last resort, however.

Hopefully you’ll never be in a foreclosure avoidance situation, but if you find yourself there, remember there are strategies to help you keep your home.