How to Avoid Foreclosure and Keep Your Home

Additional Resources For immediate advice, call 800-351-4195 to speak to a counselor on how to avoid foreclosure. Available in English and Spanish, 24/7. HUD Resources: For a list of HUD-approved counseling agencies, by state, go to www.hud.gov/counseling. HUD’s Internet page—“How to Avoid Foreclosure”–is aimed at borrowers with FHA-insured mortgages, but can help other borrowers as well. Go to www.hud.gov/foreclosure. Consumer Handbook on Adjustable Rate Mortgages (the “CHARM” booklet) issued by the Federal Reserve Board (FRB) and the Office of Thrift Supervision (OTS). http://www.FederalReserve.gov. At the FRB site, click on “publications and education resources” and then on “consumer information brochures.”

WHAT HAPPENS WHEN I MISS MY MORTGAGE PAYMENTS?
Foreclosure may occur. This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount. Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.

WHAT SHOULD I DO?

• DO NOT IGNORE THE LETTERS FROM YOUR LENDER.
• you are having problems making your payments, call or write to your lender's Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
• Stay in your home for now. You may not qualify for assistance if you abandon your property.
• Contact a HUD-approved housing counseling agency. Call 1-800-569-4287 or TDD 1 800-877-8339 for the housing counseling agency nearest you. These agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.

WHAT ARE MY ALTERNATIVES?

• You may be considered for the following:
• Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.
• Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.
• Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.
• Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan.
• Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily “give back” your property to the lender. This won't save your house, but it is not as damaging to your credit rating as a foreclosure.

HOW DO I KNOW IF I QUALIFY FOR ANY OF THESE ALTERNATIVES?
Your lender will determine if you qualify for any of the alternatives. A housing counseling agency can also help you determine which, if any, of these options may meet your needs and also assist you in interacting with your lender.

“Payment Shock” Mortgages
Mortgages like these can give you a “payment shock”:

• 2/28 and 3/27 Mortgages. A 2/28 or 3/27 adjustable rate mortgage gives the borrower a fixed payment for the initial two- or three-year period before adjusting the mortgage up as often as every six months. After the initial “teaser rate” period, your mortgage payments typically adjust up every six months.
• Interest-Only Mortgages. An interest-only mortgage lets you pay only the interest on the loan for the first 5 or 10 years and nothing to pay off the loan amount (principal). After the interest-only period, the mortgage requires much higher payments covering both interest and principal that must be repaid over the remaining years of the loan.
• Payment Option Adjustable Rate Mortgages. Payment option mortgages let the borrower decide how much to pay each month. You can even pay less than the interest, and add the unpaid interest to the total amount of principal you owe. Or you can pay just the interest or an amount sufficient to pay off the loan in 15 or 30 years. These mortgages can have an especially big payment shock.

• A “teaser rate” or “no interest” period that expires and leads to a big jump in your monthly payment.
• An option to pay less than the full interest due in any given month. Taking that option makes the amount you owe go up instead of down, since the interest you don’t pay is added to your loan balance.
• An adjustable interest rate with very high or no limits on the amount your payment can go up.
• A payment that doesn’t include an amount for paying property taxes and homeowners insurance. This means you may be hit with big bills you didn’t expect.

• Don't sign any papers you don’t fully understand.
• Make sure you get all “promises” in writing.
• Beware of any contract of sale or loan assumption where you are not formally released from liability for your mortgage debt.
• Check with a lawyer or your mortgage company before entering into any deal involving your home.
• If you’re selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state’s Attorney General, the State Real Estate Commission, or the local District Attorney’s Consumer Fraud Unit for this type of information.

WATCH OUT FOR PREDATORY LENDERS
Here are some warning signs:

• Sounds too easy. “Guaranteed approval” or “no income verification” regardless of borrower’s current employment, credit history, and assets. These claims indicate the lender doesn’t care about whether you can afford to make the payments over the long haul.
• Excessive fees. Higher lender and/or mortgage broker fees than are typical in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. On competitive loans, fees may be negotiable. It is common for home buyers to pay only 1 percent of the loan amount for prime loans. By contrast, a typical predatory loan may cost 5 percent or more.
• Large future costs. High-risk adjustable rate mortgages where the payment rises a lot after the “teaser rate” period are seldom appropriate for families who already have had problems repaying other loans. Home buyers should avoid large single “balloon” payments (a lump sum due at the end of the loan’s term).
• Closing delays. The lender delays closing, so your commitment on a reasonably priced loan expires.
• Over-valued property. Inflated appraisals that allow excessive fees to be included in the loan and result in the borrower owing more to the bank than the home is worth.
• Barriers to refinancing. Prepayment penalties that make it hard for a borrower to refinance in order to pay off a high-cost loan by taking advantage of a low-cost loan.
• No down payment loans. These loans may be split into two mortgages, with one having a much higher cost. Home buyers should be sure they can afford the payments.
• Unethical document management. Ethical lenders and brokers always require you to sign key loan papers, and never ask you to sign a blank document or a document dated before the date you sign.