By Chris Birk
Homeowners who stop paying their mortgage do so for a host of reasons. Lives and financial circumstances change. Job loss or relocation might put consumers in a bind. Housing values can plummet, leaving homeowners owing far more than the property is worth. About 6 percent of all mortgage loans were at least one payment behind at the end of the March, according to the Mortgage Bankers Association.
Whatever the catalyst, deciding to forgo that monthly payment is a choice few take lightly. Foreclosure can inflict serious damage on your credit. It'll also make obtaining another home loan next to impossible in the short-term. Missing one or even a couple mortgage payments doesn't%VIRTUAL-pullquote-There's no significant difference in score impact between a foreclosure and a short sale or deed-in-lieu of foreclosure. They're all going to hurt. % mean foreclosure is imminent. But forgoing them will set in motion a process that can have long-lasting consequences for your credit and finances.
New Foreclosure Procedures: Deceptive practices and mismanagement regarding distressed borrowers remains one of the more disturbing legacies of the housing crisis. New foreclosure avoidance procedures crafted by the Consumer Financial Protection Bureau took effect earlier this year. Mortgage servicers must now send written notice to homeowners before they become 45 days delinquent. That notice will include information on all available foreclosure avoidance options, such as a loan modification or a short sale. Under a loan modification, the servicer will add the delinquent payments and penalties to the loan balance and create a new payment plan.
A short sale is when the servicer allows the homeowner to sell the property for less than they owe. There are also additional protections for military members facing the prospect of mortgage default. There are two basic types of foreclosure -- judicial and non-judicial -- and what you encounter will depend in part on where you live. The major difference is a judicial foreclosure requires formal court proceedings, which usually means a more drawn-out process. In a non-judicial setting, the servicer can initiate a foreclosure sale without a judge's approval. Neither path is especially speedy. It took banks 572 days on average to complete the foreclosure process, according to first quarter data from RealtyTrac.
But the wait was considerably longer in some states where judicial foreclosure is the primary path, including New Jersey (1,103 days), New York (986 days) Florida (935 days) and Hawaii (840 days). The lag time gives homeowners ample time to evaluate their options. And keep in mind that servicers can't formally file for foreclosure until you're more than 120 days delinquent on your mortgage. They're also not allowed to start the process if you've applied for assistance.
Avoiding Foreclosure: Homeowners hoping to keep their property will need to work with their servicer toward an acceptable mitigation plan. The government has a pair of programs that might also be able to help distressed borrowers, one geared toward refinancing your mortgage and another focused on modifying the existing loan. Those who can't or don't want to continue making payments can explore a short sale or a deed-in-lieu of foreclosure, which involves the borrower deeding the property back to the servicer.
Filing for bankruptcy protection can also allow homeowners to temporarily halt the foreclosure process. Every borrower's situation is different. Consulting with financial professionals and attorneys can help provide clarity in terms of how best to proceed in your specific situation. If you continue missing payments or otherwise fail to finalize or make good on a loss mitigation plan, the servicer will trudge on toward foreclosure.
Credit Consequences: No matter what route you choose, foreclosure -- as well as a short sale or deed-in-lieu of foreclosure -- will hurt your credit profile. How much depends in part on what kind of credit you had going in to the foreclosure. (If you're not sure what condition your credit is in now, there are many resources that allow you to check your credit scores for free, including Credit.com.)
FICO studies have shown consumers with high scores could lose up to 160 points, a drop that could take as long as seven years to fully rebound. Contrary to common misconception, FICO also found there's no significant difference in score impact between a foreclosure and a short sale or deed-in-lieu of foreclosure. They're all going to hurt. Homeowners who experience a foreclosure will also likely need to wait at least two years to purchase another home. But the wait can be longer, depending on the type of loan they lost, the type they're pursuing and other specific factors.