An ever present fear of those with real estate loans is that they will get behind on their payments.
Unless you’re plugged into a job situation with substantial benefits, a serious illness or a death in the family, a lost job (by either spouse), or a financial miscalculation, is all it takes. A 2004 law change requires credit card companies to charge at least 4% of the balance each month, twice what the prior law required. On $50,000 of credit card borrowing, that’s an extra $1,000 per month that might not fit into the budget. Suddenly, our homeowner is behind three months worth of payments. With impounds, this could reach as much as $9,000 or $10,000. With finances already stretched thin, what are the options?
First, and before your credit is irreparably damaged by a foreclosure notice, look to refinance with an understanding mortgage broker. Most loans can be done now in two to four weeks, especially when the financial crisis was of short duration and the income stream has recovered.
If you know that the situation is beyond repair and there is equity in your home, sell it as soon as you know you can not afford the payments. If a property is in escrow, lenders will often hold off filing foreclosure notices. There are legal barriers to selling a property in foreclosure and many real estate agents stay away from such situations because of this.
Short-term borrowing is an option, especially if a family or credit union loan can be negotiated. I have already touched on the dangers of using credit cards for this purpose.
If you call the mortgage lender with your hard luck story, you may convince them that the condition has been corrected. Some lenders will add the backlog to your loan balance and make you pay extra for a year or two until you are caught up.
Another reason homeowners get behind is that the interest rate on their adjustable rate mortgage just went up and their budget no longer balances. This is a long term problem and will not be solved by any of the above suggestions. The only non-bankruptcy solutions that comes to mind are either to raise the income, or drastically curtail expenses.
So none of the above options have worked. What next?
First, some data about the foreclosure process. After a Notice of Deficiency is filed, a homeowner has 111 days before the lender can complete the foreclosure sale. During that time, if the homeowner comes up with all that is past due, the loan continues as before.
One of your options at this point of receiving the NOD, when no other recourse is available, is to file a Chapter 13 Bankruptcy. The is workable when your finances have been only temporarily impaired, your income is reasonably stable and none of the above options are feasible. Chapter 13 is a court-supervised payment plan. Your mortgage deficit is paid back to the bank over a number of months and your other creditors are paid what you can afford. If you have a car loan or a loan for that big-screen TV, you decide whether to repay those loans as agreed or return the property.
One should note that a Chapter 13 plan will stay on your credit profile for 10 years, and its saving grace is that it can save your home and all its equity.