How to avoid foreclosure: Seek counseling early

Lock and keys next to foreclosure notice

Homeowners hit by financial challenges are likely to keep their homes if they act quickly and seek help from a HUD-approved financial counselor rather than trying to work something out with their lender on their own.

That’s the conclusion of a U.S. Department of Housing and Urban Development study that found 69% of homeowners who received housing counseling were able to modify or otherwise make their home loan more affordable.

The study followed 824 foreclosure counseling clients, about three-quarters of whom fell behind on their mortgage after a loss of income. Very few had any savings to draw on to make up missed mortgage payments.

Nearly 70% of the homeowners who went for counseling quickly — either before missing a payment or within three months of not being able to pay — were in their homes and current on their mortgage payments at the 18-month follow-up period.

By contrast, only 30% of those who waited until they were six months or more behind to seek counseling were able to keep their homes.

The study authors cautioned they can’t show that counseling is the reason those who sought help early were more successful at retaining their homes.

"Homeowners who seek counseling before becoming delinquent may be more organized or motivated in general, so the better outcomes for those who entered counseling early may reflect these types of differences as much as the benefits of earlier counseling," the study authors said.

The most interesting finding of the study may be what didn’t influence the odds that you’d keep your house: "There are not strong patterns in housing outcomes by income, age, gender, marital status, race or ethnicity."

The study also looked a prepurchase counseling, where would-be homeowners learn about budgeting, credit scores and mortgage options before they buy a home.

Of 575 people who enrolled in prepurchase counseling, 35% went on to buy a house.

In the 18 months following the study, only one person in the buyers’ group had defaulted on a mortgage.

That’s a default rate of 0.17 %, compared with FHA’s current 11% default rate.

The problem with prepurchase counseling is that most people don’t think they need it.

Instead, they let their mortgage lender, real estate agent or friends tell them how much house they can afford.

More than half the would-be buyers went to counseling because they wanted information on home-buying assistance programs or thought they’d get down payment or closing cost assistance.

The average income for the group was $30,000 — so they were likely low- or moderate-income people who couldn’t go to the Bank of Mom and Dad for their down payment, which makes the fact that there was only one default even more meaningful.

The take-home message from both of these studies is the same: If you want to be sure you’re buying a home you can afford, and you want to continue to live there after running into financial difficulties, seek help from the pros as soon as possible.

Housing counseling really does work, but only if you ask for help before it’s too late.