How to Avoid Mortgage Default
By Jim Wasserman
Trouble begins with a slow-motion descent toward your first missed mortgage payment. It’s a queasy feeling thousands of homeowners know too well as their houses slip away. So what should you do if you’re in trouble? Put off car payments to make the house payment? Max out credit cards and exhaust the savings account? Stop eating out and drop cable TV? Foreclosure? Bankruptcy? Short sale?
Increasingly, these are the questions of real. Experts say how you deal with impending loan trouble goes a long way to ending it in the best way possible. Most important: early contact with the lender and being wary of the mail and phone offers of help that follow public posting of a default notice, which usually come after a couple of months of missed payments.
Alternatives to foreclosure are many, and banks prefer working with you to taking back the house.
“Sometimes it’s necessary, but it’s a last resort,” said Tim McGarry, spokesman for Washington Mutual Inc. “Foreclosure almost always represents a loss for the lender.” Not every homeowner in trouble has an escape route. Some homeowners have mortgages that charge thousands of dollars to change the loan terms. Others with adjustable rate loans may face still higher monthly payments in the future.
But experts say that there are some key steps homeowners facing mortgage trouble can do:
– Get moving on a solution or get help before it’s too late. Many people burrow their head in the sand and wait until they’ve missed two or three payments to start a workout plan.
– Write a hardship letter to your lender putting your situation in writing. It should be specific about what caused the delinquency with dates and a time frame. Make it detailed, but be concise.
– Don’t give up and walk away from your house before trying to find some kind of solution. And don’t assume a short sale – a process by which the bank agrees to sell your home for less than you owe – is your only way out.
– Be polite and work with the lender to find a solution you both agree on, whether it be extending the repayment period, suspending the need for payments for a few months, borrowing from family members or tacking the missed payments on the back end of the loan.
Derek Kirk, a real estate agent who specializes in short sales, said too many people have a misconception they’ll be approved automatically for a short sale. Banks largely aren’t saying yes unless the hardship is related to a lost job, bankruptcy, divorce, death, medical crisis, relocation or some other financial difficulty, he said. “It’s got to be something that involuntarily happened to the person to put them into a worse financial position,” he said.
That usually eliminates homeowners who have seen their interest rates adjust higher or took a loan they couldn’t afford. It rules out people who didn’t read their loan papers before signing and investors who bought a house expecting to flip it for a quick profit. In involuntary hardship cases, Kirk said, banks typically want “two years of tax returns, pay stubs and bank statements, the divorce decree, the bankruptcy filing. For medical hardships, they want letters from doctors.”
“It all goes to the bank, and they review it and if you have a legitimate hardship, nine out of 10 times they’ll move forward with the deal.”
Troubled sellers should ask about potential tax implications of the deal. In some cases sellers can be taxed on the loan amount forgiven by the bank. Still, short sales usually aren’t as hard on an individual’s credit rating as foreclosure, experts say. Foreclosure stays on a record for seven years, and it may be four years before a buyer can use regular interest rates again. Missing up to three mortgage payments also stays on a credit record for seven years. It may be several years before a borrower can buy again without getting the higher-cost “subprime” loans given to people with spotty credit records.
Refinancing, a common option when markets are rising, is tougher when they’re falling. Many borrowers don’t have enough home equity to refinance, lenders say. Refinancing also could become more difficult as government regulators press lenders for tighter standards to prevent still more defaults. McGarry said Washington Mutual considers short sales, forbearances up to 12 months when conditions warrant and reworking loans into 40-year payment schedules.
If nothing works, bankruptcy protection may be the ticket to keeping your house, said Sacramento attorney Peter Macaluso. A bankruptcy specialist, Macaluso said owners who used 100 percent financing with an 80 percent first loan and 20 percent second loan for the down payment can sometimes avoid obligations to pay the second, depending on how the bankruptcy filing is structured. “In the last five years I didn’t do but one or two,” he said referring to home-related bankruptcies. “In the last six months I’ve probably done 10, and I know my fellow cohorts are doing the same.”