Saving your Home from Foreclosure

Stop! Before you go any further, ask yourself the single most important question: why is your home in (or near) foreclosure? You cannot possibly make a reasonable plan to get out from the danger of foreclosure until you know how you got there to begin with. There are two main reasons why you might be facing this problem. You either have an income problem or you have an expense problem.

Income Problems. Simply put, you have an income problem if you are longer making enough money to pay your bills, including your home loan. This has traditionally been the reason why most people faced foreclosure. The source of your income problem might be related to job troubles. For example, getting laid off is frequently the beginning of a long road to financial ruin and the final stop is frequently foreclosure. But there are other variations on the income problem: some people find themselves in an income problem when they undergo a divorce. Self-employed business owners can see an economic downturn that slows sales.

Expense problems. There are increasing numbers of people facing foreclosure even though their income has remained the same or even increased. These people are often facing an expense problem: their home loan payments and all other bills have increased to the point where that same income does not cover all the costs. For the last few years, banks have been irresponsibly writing loans that offered very attractive ‘teaser’ rates that lured people into buying houses (or refinancing existing loans) in order to get a small payment. But that teaser rate has to be followed by higher rates and payments later. Now, “the chickens are coming home to roost.” People are finding their home payments rising by hundreds of dollars.

There is a subset of the expense problem that is completely unrelated to your home loan: the easy availability of other types of credit has allowed people to bite off more than they can chew. As credit card balances and interest rates pile up, the home loan becomes one of many bills that we just can’t pay. People in this condition are facing not only foreclosure but also bankruptcy. It is the same if you now face unexpected medical bills that are taking up what used to be your mortgage payment.

Knowing which of these categories you are in makes a huge difference in how you save yourself from foreclosure.

Income problem: you have to do one of two things. First take an immediate and honest look at how likely it is that you will be able to get back to your previous income level soon. “Soon” means within one to six months. You can probably beat the foreclosure clock if you only need a few months to get back on your feet. If you honestly will not be able to return to a level of income that lets you pay your bills, the unfortunate truth is that you probably need to get out of that loan. Start seeing if you can sell the house. Perhaps your buyer will let you turn into an immediate renter, and maybe even let you start out on a rent-to-own program. Your second immediate action item is to talk to your bank and honestly explain the situation. Let me assure you that the bank dreads foreclosure almost as much as you do. They will lose money if they foreclose, and they hate to lose money. If the bank understands your new income level, they might have some financial products that they can work with to help you find a loan that you can afford. You will never know until you ask.

Expense problem: if your expense problem is caused by your loan payment increasing, you should start shopping around for a new loan. But don’t make the same mistake again: avoid adjustable rate loans unless you are in a few unusual circumstances. See if you can lock in a good fixed rate on a long term loan. This can be combined with the advice for people with income problems: the bank will usually try to work with you to find a solution to this problem. If they wanted to own your house, they would have gone into the real estate business. They all have departments that are in charge of figuring out how to avoid foreclosure.

If your expense problem is caused by other bills, you have a much bigger problem to figure out. You are living beyond your means, and any solution that you find this month will not work unless you find a way to get your spending under control. But just like the income problem, your bank might be able to help you. If you are unable to pay your mortgage because your credit card payments are too high, you might be able to refinance and put all your bills on to one low monthly payment. But remember that if you then go out and get more credit cards, you are only taking one more step to bankruptcy.

As you think through which of these categories you fit into, remember two things. First, this problem will probably not fix itself. Taking early steps to correct the problem will make it easier to fix and will probably convince the bank that it is worth their time to work with you. Second, there are people who can help. Try the yellow pages for debt counseling services or attorneys who specialize in foreclosure and bankruptcy.