With more Americans losing their homes in foreclosures, more homeowners could benefit from loss mitigation programs that help them keep their homes when times are tough and money won't stretch. Even when losing your home is inevitable, these programs offer ways to do it outside of a formal foreclosure and avoid the black mark that repossession leaves on your credit report for the next seven to 10 years.
According to RealtyTrac, which tracks foreclosures in its monthly U.S. Foreclosure Market Report, there were 78,979 foreclosures in July 2005, up 4.7 percent from June. The company, which serves as an online marketplace for foreclosed properties, says that foreclosures have jumped 12 percent in the last two months. The survey shows that the national foreclosure rate for July included one out of every 1,465 households.
There are a lot of reasons why the foreclosure rate is so high, and growing. If you are one of those people facing foreclosure, however, you are probably more interested in learning how to get out of trouble than in rehashing the reasons you got into the situation in the first place. That's where loss mitigation can help.
As the largest home loan guarantor in America, the Department of Housing and Urban Development (HUD) leads the way in loss mitigation programs.
According to HUD's John C. Weicher, assistant secretary for housing, the agency is "committed to helping existing borrowers retain homeownership. We encourage Federal Housing Administration (FHA) lenders to make use of the increased incentives to ensure that borrowers in default are given every reasonable opportunity to recover from their financial hardship and keep their homes." He says that's why HUD recently increased the incentives it offers lenders who put at-risk homeowners into loss mitigation programs. HUD has also raised the fines it collects from lenders who fail to do so.
Non-FHA lenders also have loss mitigation programs. If you are falling behind in your payments -- or know that you soon will be -- talk to your lender. You can't "hide" from a missed payment. The lender knows it's missing. The sooner you talk to your lender, the more likely you are to be able to work out a way to keep your house. If you wait until the formal foreclosure process has started, it may be too late. The key point to remember is that the lender does not want your house. The lender wants your monthly payment, so he or she usually will work with you so they can keep getting your payment.
All lenders have loss mitigation programs, although some lenders might have different names for specific programs. There are five basic types. Since HUD pays its lenders a bonus for using them, and fines them for failing to do so, lenders are quicker to offer them to borrowers with FHA-backed mortgages. As you will see, different loss mitigation plans are used for people in different situations.
Here's how HUD describes its own programs. The first three plans help the owners keep their homes. In the last two, the owners lose their homes, but without having to go through foreclosure and the damage it does to their credit report.
1.) Special Forbearance is the most commonly used plan, designed for people having temporary problems. They might be out of work for several months, or have a one-time-only major expense. They'll be able to start making their normal payments in a few months, but they can't do anything right now. Nor can they come up with money to make all of their back payments at once. In this case, the lender will usually set up a repayment plan based on the borrower's financial condition. It might also allow a temporary reduction or suspension of payments.
Let's say, for example, that you miss three payments, but you can start making regular payments again in the fourth month. The lender would let you repay the back payments, plus interest and a penalty, on top of your regular payments over time. How long you would have to pay back the missing payments would be something you would negotiate with your lender.
2.) Mortgage Modification is used when there is a permanent change in the family income. Maybe you went from two incomes to one, or there has been a pay cut, or a new job at a lower pay rate. In this case, the lender might add the overdue mortgages to the loan and create a new loan at a lower monthly payment, and extend the life of the loan in the process.
3.) A Partial Claim is rare. It is a special plan reserved for people with long-term financial stability who cannot repay the payments they missed. In this case, HUD itself will pay the back payments. These are reserved for people in very special circumstances.
While the previous three plans are designed to help people keep their homes, the next two will help people give up their homes without having to go through foreclosure. Lenders will try to help you keep your home, but if they can see that it will not work, they will help avoid a formal foreclosure. After all, having a foreclosure on your credit report will not inspire another mortgage company to lend you money for another home when you are financially ready to buy one.
4.) In a Pre-Foreclosure Sale, the borrower sells the property. If the sale covers the amount owed, there is no problem. If it is not enough to pay off the mortgage, sometimes the lender will accept the money from the sale and forgive the rest of the debt.
5.) When a Deed-in-Lieu of Foreclosure is used, the borrower simply gives the property to the lender, and, again, the lender forgives the rest of the debt.
To learn more about HUD's loss mitigation program, and for more help on loss mitigation and avoiding foreclosure, go to http://www.hud.gov. Once you are on the website, look for "foreclosure" in the left column and click on it. Even if you do not have a HUD-guaranteed home, your lender certainly does have a loss mitigation program.
If you are in financial trouble now, or know that trouble is coming, call your lender immediately. The sooner you do, the better your chances are of weathering your money problems in the safety and comfort of your own home.