If you're facing a financial crisis and fear losing your house, know you're not alone. Like millions of other homeowners, you may have lost a job or suffered a pay cut, your adjustable rate mortgage may have reset and you can't afford the payment or falling property values mean you can't refinance.
You might think losing your house is inevitable. Maybe, maybe not. You may have options.
Mortgage relief or loan modification is probably your first, best option if you're facing foreclosure and you want to keep your home. The federal Making Home Affordable program was created in the wake of the foreclosure and housing crisis in 2009-2010. There are two forms of relief:
- Home Affordable Refinancing is for homeowners with loans through Fannie Mae or Freddie Mac. If you owe more than what your home is worth (you're under water or upside down) and can't refinance and take advantage of low interest rates, this program may be for you
- Home Affordable Modification is for those who can't afford mortgage payments due to lost income or increased interest rates, as well those who don't qualify for a Home Affordable Refinancing. Under the program, your loan will be changed so your payments better fit your budget
You need to act quickly. There's no guarantee on how long the program will be available or if anything like it will ever be offered again.
Start by contacting your lender. Be patient, but persistent. These programs are new, demand is high, and lenders are trying hard to make the programs work.
Bankruptcy usually comes into play when foreclosure has started, or it's inevitable because a homeowner and a lender can't work out a plan for paying the mortgage. But, bankruptcy may not do everything you want it to do, or everything you think it will do.
Types of Bankruptcy
For most homeowners, there are two types of bankruptcies available: Chapter 7 and Chapter 13. In Chapter 7, the court discharges or eliminates your duty to pay most types of debt. There are qualification thresholds to meet to file for Chapter 7.
Often if you have income and can repay some of your debts, you qualify for Chapter 13 bankruptcy. Here, your debts aren't discharged. Rather, they're reorganized and you repay them over a period of time, usually five years, according a repayment plan you and the court agree on.
It may be possible to keep your home and avoid foreclosure with either type of bankruptcy, but the process works in different ways. In Chapter 7, you may be able to eliminate enough of your debts so you can keep up with your mortgage and fend off foreclosure. In Chapter 13, your payment plan may allow you bring your mortgage current and stay on track with your payments.
A bankruptcy lawyer can best advise you on how your mortgage would be treated if you filed for bankruptcy protection.
The automatic stay is probably the best benefit of bankruptcy when your home is in foreclosure. It temporarily stops all collection activities and lawsuits against you, including foreclosure. This may give you the time you need to work out an arrangement with your bank or come up with the money to pay your missed payments and keep your home.
Keep in mind, though, your bank may ask the bankruptcy court to lift the stay so it can go ahead with the foreclosure.
Foreclosure as an Option?
The idea of the bank taking your home and selling it to pay off your mortgage may not sound like a good option, but it may be. If you're mired in debt, have a risky adjustable interest rate mortgage, and you owe much more than what your home is worth in today's market, it may make financial sense to let the foreclosure go through.
If you've missed several mortgage payments - and other credit payments, too - your credit rating is probably already damaged. The foreclosure will damage it more, but after it's over, you can start to repair it.
Also, the foreclosure takes time to go through - a few months, sometimes up to a year. In the meantime, you can stay in the house and not make mortgage payments. And your other property - clothes, cars, electronics, and even other real estate not connected to the mortgage - isn't affected by the foreclosure.
If, like many, that sounds unsavory or unethical to you, and you truly want to keep your home, mortgage modification or bankruptcy may be your best bets.
Questions for Your Attorney
- I think I qualify for mortgage relief, but I'm not getting anywhere in the process. Can you help me?
- My parents offered to buy my home and let me repay them so I can avoid bankruptcy and foreclosure. Do I need the bank's permission or approval? Are there any drawbacks to this sale?
- If I have a pending bankruptcy case, can I have the case dismissed and get Making Home Affordable relief?