How to Avoid Foreclosure

By now everyone has heard about the sub-prime mess. The primary cause is that 80% of subprime loans are adjustable rate mortgages (ARMS). The rate has reset to the new, higher market rate and the mortgage holder finds himself in the precarious situation of an unexpectedly unaffordable payment.

The effects

Going to foreclosure puts immense stress the individual and his credit rating for future home purchases. It becomes a cycle where the buyer has to seek out even more complex instruments designed to capture the high-risk individual’s business. This is what the subprime mess is all about. Some nefarious mortgage companies preyed on the lower-credit individual’s desperation.

Avoid it

There are steps you can take to avoid foreclosure. Below is a graphical depiction of the entire time-line of a foreclosure.

The process is quite lengthy. The most important thing is for you to get in touch with the lender and let them know of your difficulty. The earlier you do this in the process the better. Once notices have been sent, you start fighting time.

So here’s what you do:

1. Call the lender and ask to speak to the “loss mitigation” department.
2. Schedule a review of your scenario with the lender. Be sure to indicate that you wish to keep current, but need some flexibility and alternatives.
3. Be aware that your lender is not obligated to change any of your terms, but they also don’t want REO or “real estate owned” on their books. Your bank is in the business of rotating money through loans not holding real estate.

People go through foreclosure for various reasons : illness, divorce, job loss, etc. In most cases it is because they bought a house they couldn’t really afford. They got “cheap” loans that reset at 3,5, sometimes 7 yrs. When those rates reset they couldn’t afford the loans. The best thing to do is to buy a house not only that you can afford, but one that you can easily afford. I have a double-income household, but I plan on buying a house we can afford with one person’s income. I take it a step further and plan on buying a house that we can afford with the lowest income member of our household. This is the strategy that the affluent use.

The worst way to borrow is to let the bank tell you what you can afford to borrow and then borrow that amount. They use stock numbers like 4times income or something similar. If you made $100K, you can afford a $400K house. Should you? The answer is more complicated. The question to ask is “Can I easily afford a $400K house” and “Do I even need a $400K house?”

As in most things planning/preparation in the beginning of the home purchase will yield the maximum benefit. However if you find yourself in the precarious foreclosure scenario, don’t give up. Learn your options and communicate with your bank. Downsizing is not a bad thing if it is the right thing. Be open-minded and know that it is not the end of the world no matter how painful it may seem.

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