Facing foreclosure is one of the tightest spots homeowners can find themselves in. When backed into a corner, nothing is more important than staying calm and making rational decisions, even if that means picking the best of a bad set of options.
Unfortunately, a tight spot is where people usually have the hardest time remaining objective. Emotions spike, fight-or-flight kicks in, and people make rash decisions in a moment of high adrenaline.
If you or someone you know is looking down the barrel of foreclosure proceedings, the stakes are high. If the foreclosure is allowed to proceed to its conclusion, the homeowner’s financial life could be ruined for years. Now is not the time for unforced errors.
Almost as important as knowing your options is knowing what not to do. Here are seven mistakes homeowners make when facing foreclosure ...
When faced with ugly business, it’s natural to want to avoid it. Unfortunately, foreclosure lends itself to procrastination. The road to foreclosure is long, often spanning months. It’s easy to say “I’ll deal with this tomorrow” and turn your attention to more pleasant, or more pressing, activities.
Unfortunately, letting enough tomorrows come and go leads to disaster. The sooner you face reality, the more options you have. Your lender might be more willing to negotiate; you might have enough time to list the property for sale; you might be able to file for bankruptcy or at least stop arrears and late fees from piling up.
As soon as it becomes clear that you can no longer afford your payments, it’s worth considering your options and planning to avert the worst-case scenario. This could include opening negotiations with your lender for a refinance or short sale, looking into alternative financing, or consulting an attorney or advocate.
No one wants to face tough situations alone. For many people, the first people on their list to recruit to their cause are friends and family. If you have strong friendships and family ties, these can be a valuable support system and a source of strength.
However, friends and family members are usually not the best advisors when facing foreclosure. Remember, this is time for objective and dispassionate action, and your friends and family may not be objective. They may have an emotional connection to the house, or hate to see you suffer. They may enable or encourage your hope for a hail-mary outcome that is unlikely to happen.
You don’t have to face foreclosure alone, but look for a qualified, objective expert, like an attorney or advocate. You need someone who will take your side and back you up, but who will also tell you what you need to hear, not what you want to hear.
Many homeowners facing foreclosure have an unjustified confidence that the lender will come to the table. They can’t want to go through the trouble of foreclosing the house. Eventually they have to offer a refinance or loan modification … right?
The truth is, banks and lenders are perfectly willing to foreclose if it comes to that. Even if they lose money on the sale, they can file for a deficiency judgment on the borrower to try and recoup losses by attaching wages and personal property. The lender may not be your enemy, but they are definitely not your friend.
Some lenders will suggest that you apply for a loan modification, and then run out the clock, telling you your paperwork is still “under review” … only to tell you at the 11th hour that you “don’t qualify” for a modification and the foreclosure will proceed, far too late to stop it.
Keep negotiating with your lender, but don’t assume it’s a done deal because you submitted some paperwork. Use that valuable time to pursue other options, including alternative financing.
Wouldn’t it be nice to have a “fresh start?” Homeowners who find themselves unable to make payments often hope that their delinquency will be forgiven somehow—maybe added to the principal balance of the loan, or written off as an acceptable loss. After all, it was a “blip” in the borrower’s life … Why shouldn’t the lender see it that way?
The lender never will. Even a forbearance agreement only delays payments; it doesn’t forgive them. Once payments resume, the payments due will actually be higher, as the lender usually expects the back payments to be repaid within six months, twelve months, maybe twenty-four months at most.
If you can’t afford to bring the loan current anytime soon, expect a bigger and more dramatic solution will be needed to avert foreclosure. Counting on the tender mercies of the lender is a losing strategy.
Maybe the homeowner has accepted that they can no longer afford the house. What do you do when you need to sell a house? List it with a REALTOR, of course! Everyone has a REALTOR cousin, so what’s wrong with throwing it on the market?
The problem is, a listing is not the same thing as a sale. Traditional home sales may take months to close and may not close at all, wasting valuable time on the countdown to foreclosure. To sell for a good price, houses usually need to be in cherry condition, entailing renovation expenses you probably can’t afford if you can’t afford to bring your mortgage current.
Finally, if the sale doesn’t yield enough proceeds to retire the mortgage, the sale won’t close because the lien can’t be cleared.
If selling the house really is the best option, homeowners should look for an investor or short-sale specialist willing to buy the house quickly and “as-is.”
Homeowners who have missed several mortgage payments may take a fatalistic attitude toward the credit damage they face in foreclosure. After all, if they have missed nine or ten mortgage payments already, how can it get worse?
It absolutely can get worse. Missed mortgage payments leave your credit after seven years, but foreclosure judgments stay on your credit record for ten years and hurt even more, often making it impossible to rent certain apartments or even land certain jobs. Add to that a potential deficiency judgment, and your credit score will be stranded in the “Poor” or “Very Poor” range for a decade.
Faced with a seemingly insurmountable challenge, many homeowners facing foreclosure give in to despair. They throw their hands up and throw themselves on the mercy of fate.
This is the worst choice of all. Even at the very last minute, more favorable options exist than allowing a foreclosure to proceed.
Even if it seems like time is up and all hope is lost, homeowners facing foreclosure should seek professional support. Until the foreclosure auction is closed and the sheriff arrives to lock up the house, it isn’t over.