While over-obligating yourself or unexpected repair bills may jeopardize your ability to keep up
your house payments, the primary causes of foreclosure and bankruptcy are unanticipated
personal crisis. More homeowners lose their homes because of illness, loss of employment or
marital problems than all other reasons combined.
None of us factor these things into our plans for the future, but you should know about some of
your alternatives if you find yourself in such a position. It is much easier to look at alternatives and
plan an effective course of action before you are in trouble and in a state of anxiety and stress.
Sometimes you can see the trouble coming before financial problems begin. An advance notice of
a layoff means the family income will be severely cut back or eliminated in the near future. A
major medical operation or property repair bill may be more than you can afford to repay, even
with a short term loan. You have to address the situation as soon as possible or risk losing your
home.
There can be a number of local sources that can help you get over the hump. Churches and civic
groups may have assistance programs or may know what is available. Non-profit organizations,
particularly housing assistance groups or counseling agencies, may manage special assistance
programs. State and local housing agencies are also places to inquire to help.
If Your Mortgage Becomes Delinquent
The day of the month on which your mortgage payment is due, usually the first day of the month,
is set out in the mortgage note. Your payment is considered late if the lender receives it after the
due date, and the lender usually will charge a late payment fee when the money is not received
within 15 days of the due date (the timing and amount of late charges may vary from lender to
lender). Payments made, including any late charges assessed, before the next payment due date
will be accepted by the lender, but if you owe two or more mortgage payments, your home is in
serious jeopardy. Unless specific arrangements are made with your lender, you must remit all
payments and late charges before the money will be accepted and the loan considered current.
When three or more mortgage loan payments are due and unpaid, the loan may be given to the
lender's attorney and foreclosure proceedings initiated. The entire balance of the loan may be due
and payable immediately. In addition to the loan payments due, you are liable for legal fees
incurred by the lender. At this point, you are in serious danger of losing your home.
What To Do When You Default On Your Mortgage
No lender wants to foreclose on a mortgage. Foreclosure costs them more money than they can
make back from the foreclosure sale. Therefore, lenders do not foreclose in order to make
money, but only reluctantly as a way of limiting losses on a defaulted loan. This is why, if you get
behind on your mortgage payments, your lender will work with you to devise a practical plan to
cure the default and bring the loan current. In order to do so, however, you must stay in
communication with your lender and be honest in evaluating your financial situation.
The willingness of the lender to work with you to get past your current problems will depend
heavily on your past payment record. If it shows consistently timely payments and no serious
defaults, you will find the lender much more receptive than if you have a record of unexplained
chronic late payments.
If you are falling behind in your payments, or know that you are likely to in the immediate future,
there are some steps that you should take before talking with the lender about alternative
payment arrangements.
First, you need to prepare a monthly list of your income and expenses, using realistic figures
based on your current financial situation. You will also need to put together a complete financial
disclosure package, showing your assets and liabilities, including all debts and monthly payments
and when they are due. Pay stubs, unemployment check stubs or other proof of current income
should be in the package, along with two years' tax returns. Get an estimate of the value of your
property. Finally, prepare a written explanation of your situation for the lender and offer any plan
or suggestion you may have on how you can bring the loan current.
Mortgage Loan Workout Plans
A loan workout plan is an agreement between you and your lender that sets out the steps to be
taken to cure the delinquency and prevent loss of your home. It may be written or oral and will
have specific deadlines which you must meet in order to avoid foreclosure. Therefore, it must be
based on very realistic estimates of your ability to meet the plan schedule.
The nature of the workout plan will depend upon the seriousness of the default, whether your
financial problems are short-term or your payment ability has been impaired for the foreseeable
future, your prospects for obtaining funds to cure the default and the current value of your
property.
If the default is caused by a very temporary condition and is likely to be cured within 30 to 60
days, the lender may consider granting you temporary indulgence. Some examples of cases
where this approach would be considered are where the house has been sold but the sale has not
settled or where an insurance settlement is pending. It is usually possible to determine a date
certain for curing the default. The lender will want documented evidence, such as the sale
contract, before granting indulgence.
If you have suffered a temporary loss of income but can demonstrate that it has returned to
previous levels, you may structure a repayment plan to bring the loan current. This type of
workout arrangement requires your normal mortgage payments be made as scheduled, plus an
additional amount that will cure the delinquency in no more than 12 to 24 months. In some cases
the additional amount may be a lump sum due at a specific date in the future. Repayment plans
are probably the most frequently used type of workout agreement.
In some circumstances, it may be impossible for you to make any payments at all for some
period of time. If you have had a good record with the lender, a "forbearance plan" will allow you
to suspend payments or make reduced payments for a specified length of time. The forbearance
plan will be in writing, have a definite term and spell out the method of ending the delinquency. In
most cases the length of the plan will not exceed 18 months and will stipulate commencement of
foreclosure action if you default on the agreement.
Any workout agreement is a last-ditch effort by you and your lender to avoid foreclosure and
keep you in your home. It is not a substitute for good budgeting and financial planning on your
part and will probably not be available if your payment record has not been consistently good up
to the present time. Lenders will work closely with good borrowers who are having a period of
real emergency and hardship, but are not inclined to cooperate with those who demonstrate little
financial discipline.
