How to Avoid Foreclosure
What would you do if you were about to lose your home? What would you be willing to do to keep it? Is it even possible to keep it once you've missed a few payments?
The recent rash of stories about subprime lending, housing market crashes, and the subsequent stock market fluctuations has made me a touch nervous. If you think that only the poor, old, and mentally disabled have been targeted by subprime predatory lending, then you'd be wise to note that that's not true (thanks, Consumerist, for the link).
If you haven't been following the story, American Public Media's radio show Marketplace has an excellent summary of the situation here. Especially tragic is how the practice of selling chunks of mortgages to investors (rather than having a bank back them entirely) was started to help more people buy homes.
At least 4 properties (all rentals, all owned by the same person) on my street alone are being auctioned off within the next month, and that kind of activity is going to affect my property values (which are probably never going to be as high as they were when I bought the house anyway).
How can you avoid foreclosure, if you've been recently hit by high interest rates or financial disaster? For people who bought homes for the purpose of reselling them (otherwise known as 'flipping'), it might be difficult to avoid foreclosure. However, there are a few things you can do to try to keep your home.
1. Don't ignore the problem! Are you getting letters from your lender? Don't ignore them! The worst thing you can do is hope that this problem is going to go away. All lenders have a Loss Mitigation Department - call them immediately if you think you are going to fall behind on your payments. And make sure that you get to the Loss Mitigation department, and not just the collections department. Loss Mitigation departments will often work with borrowers to work out a payment plan.
2. Don't take any more loans! You're in deep enough trouble as it is with banks, and the only institutions who will want to loan you money now are the scammers who will do everything in their power to take away all of your assets, including the shirt off your back. That includes the loan sharks who are probably publishing the ads that are popping up all over this blog post right now ("Avoid foreclosure??? Low interest loans, fast, over-the-phone!"). Stay away from these bastards.
3. Rent! If you own more than one property that's languishing on the housing market, and the mortgage is not astronomically high quite yet [but still too high for you to pay along with your other mortgage(s)], you may consider renting it. There are costs and benefits to renting a property. Smart Money lists some here. For instance, you can deduct out-of-pocket expenses, such as mortgage interest, repairs, advertising fees for listing the rental, cleaning services, utilities and more.
Then there's the "phantom deduction" called depreciation. Just divide the fair market value of the property at the time you start renting it out (excluding the cost of land) by its recovery period — which is 27.5 years for residential rental property. Bingo! There's your annual depreciation. For example, if the home is worth $550,000, you divide that by 27.5 and get a $20,000 annual deduction. "The depreciation deduction will cover a lot of the [rental] income you're receiving, so it's a nice tax shelter," says Jeff Callahan, a CPA with Bederson & Co. in West Orange, N.J. "If you have another $10,000 in out-of-pocket expenses, which are also deductible, you can get $30,000 in rent tax-free," he says.
There are other things to consider when renting a property, too. The rental market matters, as does your area, the home's potential appreciation all factor in to the equation, as well as your ability to be a no-nonsense landlord to possibly unreasonable people.
In application to the home you live in, roommates (although incredibly annoying) are a great way to supplement your mortgage.
4. Call an HUD-approved housing counseling agency. They might be able to point you in the direction of government and community programs that can help you.
5. Additional Options: There are some other options that you may qualify for, that will help you avoid actual foreclosure. They're not ideal, but they are less damaging to your credit in the long run than actual foreclosure.
- Special Forbearance: Payment plan that may even allow a temporary suspension of payments.
- Refinancing: This is unlikely given today's market, but might be a possibility for people who have built up their credit score since they purchased their home.
- Partial Claim: U.S. Department of Housing and Urban Development (HUD) will pay your lender to bring your mortgage up to date, but a lien is placed on your property.
- Pre-foreclosure sale: Sell your house for less than it is worth in order to avoid a full foreclosure - pay off part of the loan. There are obvious downsides to this, and you will still owe some money to the bank, but it's probably preferable to foreclosure, too.
- Deed-in-lieu of Foreclosure: This is where you give your property to your lender before it is foreclosed on. It may seem as hideous as losing your home to foreclosure, but it won't hit your credit as hard.
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