Protect Your Credit with Alternatives to Foreclosure - dummies

Protect Your Credit with Alternatives to Foreclosure

By Steve Bucci

If you’re having trouble making your mortgage payments and your credit is in trouble, you may have a host of options to help you avoid the expense and upset of losing your home through a foreclosure. Even if you can’t or don’t want to keep your house, you can still lessen the damage to yourself, your family, and your credit by taking positive action.

Before you take any action, assess your situation as dispassionately as you can. If stress and anxiety make that impossible, seek help from a third-party professional such as a nonprofit HUD counselor or an attorney.

Your situation may not be as bad as you think it is, or it may be worse. What’s important is to know for sure where you stand. You need what’s called loss mitigation counseling, which is help to develop a solution that enables you to afford to keep your home or lessen the damage caused by a foreclosure.

What to do first

If you already have a plan to resolve your problem, catch up, or at least resume payments in three to six months, consider the following suggestions:

  • Find a good nonprofit housing counseling agency. Try the Hope Hotline (888-995-4673) or Hope Now or a nonprofit credit counseling agency that has a HUD-approved housing counseling program. Expect an assessment of your overall financial picture and whether you can realistically afford your mortgage payments.

  • Ask your mortgage servicer about a repayment plan. The servicer sets up a structured payment plan that gets the mortgage back on track in three to six months by making up past-due amounts in addition to your regular payments. Get all the terms in writing so that you’re both clear on the terms. The sooner you do so the less damage to your credit report and score.

  • Check the HUD and Fannie Mae websites for resources and help. Both sites have excellent referral resources, information on programs that might be right for you, and warnings to keep you from falling for scams.

  • Don’t wait until it’s too late! Talk to your lender about your need for assistance. Some servicers have programs for those who are not yet delinquent and other programs for borrowers who already are delinquent. Get started as soon as you know that you have a problem making your mortgage payments as agreed, and be sure to ask for all the options your servicer may have for you.

What to do for more serious problems

For problems that may take longer than three to six months to remedy, ask for mortgage loan forbearance or loan modifications.

A forbearance temporarily modifies or eliminates payments that are made up at the end of the forbearance period. This option also prevents your credit from being damaged by a string of late payments.

A loan modification permanently changes one or more terms of the original mortgage in a way that addresses your specific needs. If this option seems intimidating, use a HUD-approved agency to deal with the servicer and offer solutions on your behalf. Clear communication is key here.

Modifications need to be in writing and approved by both the servicer and the borrower. Don’t be surprised if the servicer asks for a fee to cover the costs of processing a loan modification.

What to do to end matters

Even when you can’t solve your problem or just can’t stand it anymore, you’re better off staying in control of the process rather than just giving up. Doing so can lessen credit damage and expenses and keep your dignity — and maybe your sanity — intact.

The following are some of the many options available. And don’t forget that another reason to use a free professional mortgage counselor is that newer options may be available to you as well.

  • Sell your home: You may be able to sell your home in a short sale if you have no equity left or a pre-foreclosure sale if the value of the house still exceeds the amount due on the mortgage.

    • Short sale: You get your lender to allow you to sell your home for less than the mortgage value. This option is generally cheaper for the bank and less stressing for the homeowner than a foreclosure. Because it is good for the lender, you can negotiate a bit. Ask that the loan deficiency be reported to the credit bureau as a zero balance rather than a charge-off.

      Be sure to find out what the consequences of a short sale or foreclosure may be before you proceed. If the act expires, you may have to pay income tax on that amount. Also check to see whether you may have state taxes due, as they aren’t covered under this federal law.

    • Pre-foreclosure sale: A pre-foreclosure sale arrangement allows you to defer mortgage payments that you can’t afford while you sell your house. It also keeps late payments off your credit report.

  • Deed-in-lieu of foreclosure: If the home can’t be sold, you can sign the title over to the lender and move out. To qualify for this option, you usually can’t have a second mortgage, a home equity loan, or another lien on the property.

  • Stopping payments as part of a plan: Not a great option, but if your plan is to save money for rent or for the larger down payment you’ll need for a new place to live, then setting aside the money you would have paid for your mortgage can accrue several months or even years of savings. The price can be high in credit damage and stress, however.