Escaping Foreclosure Hell: Five Important Steps
It might seem easier to ignore the problem at hand by stuffing your mail in the dog house or pulling the covers over
Has the bank sent notice that your home is in foreclosure and you feel like the walls are closing in on you? Before you do something drastic, take a look at the following five steps; they could very well save your home and your credit score.Step 1: Remain Calm
It might seem easier to ignore the problem at hand by stuffing your mail in the dog house or pulling the covers over your head every time the phone rings, but in the end denial will only make matters worse. According to Chris Scully, a loan officer at Emery Federal in Burbank, California, the first and most important thing you can do is take a deep breath and calm down. "There are steps you can take to keep your house or limit the amount of damage to your credit, but none of them involve being emotional in any way," he says. "You have to get a hold of yourself."
Scully recommends taking an objective look at your situation. "Is your inability to pay temporary or permanent?" He explains that being able to answer this question alone can help determine your best course of action. "A layoff should be temporary while loss of income due to a death in the family or disability could be permanent." The decisions you need to make next will hinge almost exclusively on this.Step 2: Budget
It's no question that you're in financial hot water. The reality is that, of all the payments you have to make every month, the mortgage is the most important one credit-wise. Scully explains, "As a loan officer, I'd much rather see a credit report with late payments on credit cards and/or a car repossession and a mortgage that's always current than one that shows late house payments but a BMW that's always paid on time."
Scully notes that establishing a budget is integral to ensuring that the right bills get paid -- if you want to save your home. "Get a grip on the minimum amount of income you can absolutely count on per month, whether it's from unemployment, insurance, whatever. Then figure out the bare-bones expenses you have to pay to survive: food, power, water, phone, shelter, and transportation." If, after cutting your expenses and bills down to the bare necessities, you still find yourself unable to cover the mortgage, you will need to focus hard on the next step.Step 3: Negotiate
Believe it or not, your bank or lending agency wants you to stay in your home just as much as you do. "Banks are not in the foreclosure business, so they may be more willing to renegotiate or modify their rates to help get the loans off their books and keep you in your home," explains New York real estate attorney Edward A. Mermelstein. "If your home is scheduled for foreclosure, contact your mortgage service or credit counselor. Your mortgage lender may be willing to postpone the foreclosure sale date in order to allow sufficient time to evaluate eligibility for the new modification program."
Bottom-line: negotiate for a payment you can afford to pay. It's what you and your lender want the most. Mermelstein adds, "Know your mortgage rights. Review loan documents so you know what your lender may do if you can't make payments. Also, research the foreclosure laws and time frames in your state [every state is different] by contacting the State Government Housing Office." While the extra work this entails may appear as little more than added stress, it could very well be the difference between staying comfortably cozy in your own castle and losing it.Step 4: Beware of Scams
For every good person or organization wanting to help, there are a gaggle of thugs looking to make a quick and crooked buck. According to Cleveland State University Professor of Urban Studies Brian Mikelbank, homeowners should not be paying for assistance. "There are other resources that are financing these housing counselors, enabling them to offer free service."
His advice? "Don't pay for anything, don't sign for anything. The only person that homeowners should pay to help get them out of foreclosure is an attorney they initiate contact with and have references for." He also suggests that homeowners look to other sources of potential help, such as HUD-approved housing counselors, community leaders, council members, mayors, or county officials. "If foreclosure can't be avoided, those are the folks that can help you get out of the [mess] with the least amount of damage to the rest of your financial situation."Step 5: Protect Your Credit
So you saved the house, but what about your credit? The unfortunate reality is that even though you worked things out with the lender, your credit rating may still suffer big time. "A foreclosure can drop credit scores by as few as 50 to as many as 250 points, depending on how many points someone has to lose," explains Linda Ferrari, credit rating professional and author of "The Big Score: Getting It & Keeping It, Buying Power for Life."
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According to Ferrari, an August 2008 announcement from Fannie Mae and Freddie Mac clearly states that they place no requirement on how lenders report mortgage default accounts to the credit bureaus. "If the Fair Credit Reporting Act doesn't require lenders to report negative information at all, or in a specific manner, this leaves the door wide open for negotiating deletions or non-reporting of these items." So with a little effort, you may be able to get your lender to hold off on (or remove completely) any negative credit notes being added to your credit file.
The foreclosure crisis hitting the U.S., and much of the world, has reached epidemic proportions. According to Reuters, almost 40 percent of all sub-prime borrowers were at least 30 days behind on their mortgages. Numbers like this show that bad economies can happen to good people. Be smart and don't let yourself become another statistic. A little hard work now will protect you from the worst parts of the foreclosure crisis today, and may even lead the way to a better financial tomorrow.