Our 3-step plan to fix your financial crisis
If you're buried in bills, falling behind on your payments and wondering where you'll get the money for your next mortgage payment, you need help.
We can tell you where to go, what to ask and what to expect.
Failing to seek help is often the biggest mistake families and individuals make when rising costs, the loss of a job or a medical emergency plunges them into a financial crisis.
According to a recent survey by Freddie Mac, one of the federally chartered buyers of home mortgages, and Roper Public Affairs and Media, a market research firm, more than half of the people who fall behind in their payments don't even try to work out a solution with their lenders.
We can't promise a rosy ending. But our three-step plan provides a clear course of action that will help you break the stress-filled, downward spiral and avoid the ultimate financial disaster -- foreclosure.
Step 1. Go to a credit counselor to get your credit card, car loan and other monthly bills -- everything except your mortgage -- under control.
You may be able to resolve your money problems just by reducing those expenditures to a more manageable level.
To do that, you need a reputable, well trained credit counselor, who can:
- Negotiate a realistic, 36- to 60-month repayment schedule with your creditors.
- Get them to reduce or waive many of the late fees and other penalties they've imposed.
- Stop most if not all of the harassing phone calls you're undoubtedly getting from collection agencies.
- Help you re-establish credit after your debt is paid.
Unfortunately, some of the most heavily promoted "nonprofit credit counselors" are really in it for the money. Your money. And you've got to avoid them.
So we recommend that you go to a member of The National Foundation for Credit Counseling, the nation's biggest and oldest credit-counseling organization.
Its 120 member agencies abide by a set of professional and ethical standards that have served many individuals and families very well over the past 50 years.
Click here to to find a credit counselor near you. Use the "Zip Code Search" to get a list of nearby agencies. Click on the individual agencies to find everything from fees to office hours.
The fees will be very modest. Many NFCC members charge nothing to review your finances and less than $100 to establish a debt repayment plan.
In the end, you'll write a single monthly check to the credit counseling agency that will be less than you're paying now and the agency will divvy that money out to your creditors.
If that brings your monthly expenses back in line with your monthly income, great. You have solved the crisis.
If not, move on to...
Step 2. Call your bank or mortgage company and renegotiate the terms of your mortgage.
If you miss one mortgage payment, you will get a letter and a phone call from the mortgage company. If you miss three payments, the lender will begin foreclosure proceedings.
Don't let it go that far. In fact, if you know you will be late with a payment call the lender before he or she calls you.
A lot of homeowners avoid talking to lenders because they are scared, embarrassed or they figure nothing can be done because they don't have the money.
That's a big mistake. There are a number of options available and the sooner you explore them, the better your chances of keeping your home.
Let's make one thing clear: The lender does not want your house. Lenders are in the business of making loans, not selling real estate. They want their money, not your home.
Every lender has a "loss mitigation" department or a person trained to help you keep your house. Let them help you. Use their expertise.
Do not move out of your house, as you may not be eligible for assistance if you do not live in the property.
When you call your lender, he or she will probably ask you to fill out forms that state your income, your debts and other details of your financial life.
The bank or mortgage company will evaluate that information to make a critical decision: Do you have the wherewithal to work your way through your financial crisis and resume making your mortgage payments or not.
If the answer is yes, then the bank will be willing to help you by offering one of these alternatives:
- Forbearance: This allows you to make partial payments or no payments at all for a few months. You'll be expected to catch up later.
- Reinstatement: Reinstatement allows you to make-up any missed payments in a lump sum and then continue paying your monthly obligation as before.
- Revised repayment plan: The lender adds the missed payments to future payments on a pro-rated basis plus interest. These increased payments can be paid back over a period of time until you are current.
- Mortgage modification: The lender can change the terms of your mortgage to allow you to make smaller monthly payments. These could include: extending the term of the loan, which would automatically lower the monthly payment; adding missed payments to the balance of the existing; or turning a rapidly rising adjustable-rate mortgage into a more manageable fixed-rate loan. It is sometimes possible to use a combination of the above.
Step 3. Find the best real estate agent you can and sell your house before it is foreclosed.
When a lender won't help, you probably can't afford to stay in your house no matter what.
That's a harsh judgment, but one you need to deal with before late or missed payments throw you into default and your lender files to foreclose and seize your home.
Foreclosure is not only an emotional burden.
You stand to lose a big part of the equity in your home by the time your lender sells it, recoups what you owe and imposes a bevy of penalties and fees.
Equity is the part of the home's value that you own and it might be more than you think.
Let's say you bought a house for $250,000 with a minimal $5,000 down payment. But over the past couple of years you've paid off a few thousand dollars of your $245,000 loan and the house appreciated by 8% a year making it worth more than $290,000. So you would have $48,000 at stake.
Even if you had taken our a home equity loan and drained two-thirds of that away to pay bills, you'd still have $16,000 on the line that you will need to pay off debt and find a new place to live.
It also is a black mark on your credit that will follow you for seven years, making it difficult to get new credit, buy a car, rent an apartment or even get a job. You could also pay more for insurance with a foreclosure on your record.
So even if you don't have any equity in your house, you still shouldn't pack up and walk away.
You need to find the best real estate salesperson you can. Maybe you already know someone. Or ask neighbors and friends who worked hard and successfully for them.
Tell the real estate agent your situation and negotiate a reduction in the standard 6% commission. The real estate agent should be willing to accept at least a point and maybe two points less because the likelihood of a sale is very high.
Do all the minor repair work your agent recommends to make the house more saleable (you'll get the money back when it is sold), price the house towards the lower end of what homes are selling for in your neighborhood, and take the first reasonable offer you get.
Once you have a buyer, you may need to go back and seek your lender's help to close the deal. Here are three things you could ask for and stand a good chance of getting:
- Help paying taxes and fees required to sell your home. The lender may be willing to pick up some of those costs to get the home sold without the expense and hassles of a foreclosure.
- Allowing a buyer with good credit and enough money to assume your mortgage, even if it is a non-assumable mortgage, which most are these days. With interest rates going up over the past two years, offering potential buyers a fixed-rate mortgage under 6% would be an advantage in selling your house and you should make the most any advantage you have.
- Approval for a "short sale" in which you sell your house for less than you owe on your mortgage. The lender agrees to write off the difference.
If all else fails, the mortgage company may agree to a deed-in-lieu of foreclosure.
After having tried to sell your home for 90 days, the lender gets title to your property in exchange for canceling the debt. You lose your home and any equity you might have had in it, but you avoid having a foreclosure on your credit history.
The bottom line: Don't assume there is nothing you can do no matter how tough your financial situation has become.
Relatively few potential foreclosures actually end in foreclosure. Do whatever you can to avoid being one of them.