Options for the Borrower in Default or Facing Foreclosure

Typically, less than 5 percent of homeowners lose their homes. However, many more face this fear at some point in their lives when something goes wrong."

PREVENTION STARTS EARLY

• Buy a home with a "comfortable" monthly payment, even though you may qualify for a more expensive home.

• Do not charge up a lot of house-related debt after buying! This is the most common mistake people make.

• Pay on time every month. If you have a history of late payments you are much less likely to get help if ever threatened with foreclosure.

• Make pre-payments whenever possible to give some cushion for future emergencies. A regular pre-payment of $138.21 every month on a $75,000, 30-year mortgage at 11 % can shorten the term of the loan to 15 years and save you $103,669 in interest!

IF YOU GET BEHIND...

• Go to your lender immediately and be honest about the problems. Mortgagors are more willing to work with people than we think!

• Stay in communication with your lender. Avoiding your mail and phone calls is the worst mistake you can make.

• If you have an FHA or VA insured loan, seek counseling immediately.

If you have an FHA insured loan, the U.S. Department of Housing and Urban Development's Assignment Program may stop the foreclosure and take over the loan. Under certain circumstances, FHA is empowered to lower your payments or to extend the life of the loan. You must contact a HUD-Certified counselor(757-5540 in Chattanooga or 549-9444 in Knoxville) within 15 days of receiving the notice of default, or it will be too late.

If you have a VA loan, you have special rights regarding delinquency and default. Call Nashville (736-5186).

You may be able to get the money needed to bring the mortgage current by selling assets, borrowing from your saving plan /401K, or other methods. Explore all possibilities, but be realistic in evaluating whether you'll be able to keep up timely payments in the future without a lot of strain. If you can't bring the mortgage current, the following options may be available:

Straight Sale

If your house is foreclosed and sold at auction on the courthouse steps, it may sell for less than your loan balance. In this case, the lender will sue you for the difference ("deficiency balance") and may garnishee your wages. The best way to avoid foreclosure is to put the house on the market. Especially if you have equity in your house, it is worth trying to recover it; however, you might decide to price it low and get just enough to pay off the loan.

QUESTIONS TO ASK YOURSELF:

• Do I have at least 6 weeks before foreclosure? If not, I won't have time to sell.
• Will the condition of my house prevent approval by the appraiser?
• What is the exact balance? How much more than the balance amount will I need to pay off the loan? (Some lenders are allowed to charge you 10 to 15 percent of the principle as a fee when you sell. Call and find out.)
• Do I have cash for a deposit and first month's rent if I need to move out quickly?

Many people think that homes take months to sell, or that your home has to be in good shape, but this is not always true. It is important to set a realistic selling price and not to hold out for the best price possible.

If the house is close to foreclosure, negotiate with the lender for a delay to get the home sold. Consider selling the house at a substantial discount just to avoid devastating your credit.

Rent the Home

In the Chattanooga area you can get about $450 to $550 for a two-bedroom home and from $550 to $1000 for a 3 or 4 bedroom, depending on the neighborhood. Even though you may be in a desperate hurry to rent, you should screen tenants carefully and check their credit. Call the Housing Info Line for advice on land-lording! Get a deposit and inform your homeowner's insurance company or you may not be covered for accidents in the home.

Chapter 13 Bankruptcy

This can stop the foreclosure proceedings any time right up to the day of the sale. Your attorney's fees are figured into the plan, so you won't need cash up front. However, to file Chapter 13 you must be able to pay off any arrearage within 5 years. In this type of bankruptcy the court takes money for your creditors out of your paycheck before you ever see it.

Chapter 7 Bankruptcy

You can stop the foreclosure, but only if you can pay up all the arrearege in cash.

Forbearance

In a forbearance, the lender schedules increased monthly payments to catch up on the arrears. Lenders generally do not like a plan that is less than a payment and a half. They do like the plan to start immediately with a large first payment. You must evaluate your current and potential income versus expenses. You might be able to manage a payment and a half or a third or even a quarter. Whatever plan you create must work for both you and the lender. The lender - in most cases - will not consider a reduced payment, that is, one that would be lower than the normal required monthly mortgage payment.

Temporary Indulgence

The lender/servicer gives the borrower a short grace period, usually a month or two, to get finances in order and bring the mortgage current.

Refinance

Unless the interest rate is at least two percent lower, it is not worth going this route since the costs are high. Generally, positive equity in the property is required for this strategy, but not always.

Assumption

First get the approval of the lender. Then find a buyer to assume your loan for a total cash cost of only about $500 rather than several thousand in closing costs and down payment. (Advertise it as "assumable" and you will attract buyers.) These loans are referred to as "assumable with qualifying", which means that the buyer is a creditworthy applicant meeting the lending standards of the financial institution.

Assumption sales can be done when other types of sales would not work. You and the buyer can write a private agreement about paying you for all or some of your equity. Make your terms easy for a quick sale and have a real estate lawyer go over the contract.

Compromise/Pre-sale

It would be unusual, but your mortgage insurance company might buy your house in a "pre-sale" arrangement. Call them early to discuss your plight.

The PMI company simply pays off the loan (if the payoff doesn't exceed the limit of your policy) and now holds your mortgage. They may set easier terms than your old lender and they may forgive the arrearage altogether

Modification/ Capitalization

A loan modification involves changing one or more terms of a mortgage. This may be necessary to help bring your defaulted loan current, to prevent a foreclosure, or to allow payment reductions due to unusual hardships. Modifications can be:

1. to reduce the interest rate of the mortgage and thus lower payments

2. to change the mortgage product(for example, from an adjustable rate to a fixed rate)

3. to extend the term of the mortgage and thus lower payments

4. to capitalize delinquent payments (in extreme hardship situations)

Workout/Advance Claim

As a last resort, the mortgage insurance company may consider advancing the dollars you need to bring the mortgage current. This is sometimes referred to as an advancement of claim or a work-out. The delinquency must have been due to circumstances beyond your control and you must be able to show future ability to keep up payments. You will be expected to repay the mortgage insurance company, in most cases at zero interest.