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What Do You Do When You Face Possible Foreclosure?

by Ryan Guina

From time to time I receive reader questions which I try to answer. Many times I can send a quick response referencing an article I have written before, or a series of other resources that may be helpful. Other times I receive questions that don’t have easy answers. Today is one of those times.

What Do You Do When You Face Possible Foreclosure?

Q Stressed Out writes: So, here’s the story with our house. We love it. We poured our heart and soul into fixing it up and it truly is custom made for our family.

When we refinanced it, the market wasn’t so bad. My husband was making pretty good money, we got a (high 9%) fixed rate and we owe about 178,000 on it. That was OK with us since it’s all we could qualify for and the house was appraised at about 200,000. Then, you know the story…market tanked and my husband lost his job…twice.

So now we’re stuck holding a $1600/mo mortgage for a house that might not even appraise at what we owe for it. I just pulled comparable houses in the area online and they’re ranging from $150-$199 so its a gamble that we’d make enough to cover our mortgage plus closing costs…and that’s if it even sold at all. We have a lot of houses sitting on the market around here. But, we keep falling behind with the mortgage company and can’t keep up with our property taxes at all, which aren’t wrapped into our mortgage payment so they add about an extra $200/mo.

I mean, we really really don’t want to sell our house and rent something. We feel like it’s a huge step in the wrong direction for us because we won’t qualify for another mortgage for a long time. We may not even be able to sell the house. But, is it worth looking into?

My husband is now working again and I got a part time job. We can’t refinance because this past year wrecked our credit and I don’t think anyone would give us a lower rate…besides, then you pay closing costs all over again, and our total amount owed would probably go up. I’m just trying to figure out my options. My husband called HSBC (our mortgage company) today and they’re sending him a packet to fill out because they do have a mortgage modification program for people going through financial hardship. So, there’s a possibility that they’ll be able to lower our payment, which doesn’t involve credit through them since we are existing customers. I’m not counting on that, though…

We just feel trapped. Sell the house for a possible loss? Stick it out and hope the market turns? (doubtful) Who knows.

Help!

A Stressed Out, thanks for writing. I’ll preface this by saying there is no easy answer for your situation and it will be a good idea to examine all your options. I posed your question to several colleagues who have sent me their response. In the mean time, I recommend continuing the job search, and looking at your options.

Plonkee from plonkee.com.

I’m sorry, this is not a great situation.

I don’t think you’ll be able to refinance because you are probably upside down on the mortgage. If you are able to make revised mortgage repayments and property tax by getting some help from the mortgage company, then you might be able to hang in until everything picks up. But it might be worth putting the house on the market to see whether you can get any offers – more concrete choices are probably better in this situation.

Otherwise, it sounds like the only option is to allow the bank to foreclose on the house. That would not be the end of the world, but you would need to be careful not to end up homeless, and how it would work out (and whether you would still owe the bank any money) would depend on the laws where you live.

Either way, it’s great to hear that you and your husband are bringing in money, that’s definitely a good thing.

Larry from Gather Little by Little.

Wow, terrible situation and you aren’t alone. Your in a similar situation to many in the US right now.

Sounds like your bank may work something out with you. I know they are working really hard with people to avoid foreclosure, so I hope and pray the modification plan works out. Sounds like that is your best bet right now.

A couple of options to consider:

  • Short Sale - If you really think you might be facing foreclosure, this might be a good option to consider. I am no expert on them, but know enough that while it won’t solve all of your problems, it might relieve a good bit of the stress. You could then rent something for you to live in until you get back on your feet.
  • Rent - Have you thought about renting the house out? If you could rent it for your payment, that would cover the mortgage. You could then find someplace less expensive to rent and live in, again until you get back on your feet. Once back, you could move back into the house once the tenants lease was over.
  • Rent out a room - I’m not sure how your home is laid out, but have you considered renting out a room? If you could get some help with that mortgage by renting out a room to someone, that might help out enough for you stay afloat for a while.
  • Foreclosure - Like Plonkee said, foreclosure is not the end of the world. While you would lose your home and impact your credit (although it’s already been hit hard I’m sure) it would get rid of the financial obligation. You could then find a place to rent while you get things back in order.

Best of luck to you. Just remember, it’s just house…bunch of wood nailed together. Keep you family together during this time and stay close to your husband. Focus on what is really important and lay everything else to the side.

Pinyo from Moolanomy.

Stressed Out, I am sorry to hear about your predicament, especially when you are so attached to your house. It makes this a much more difficult decision for you.

Let’s consider what makes the most financial sense first. What is the going rate for rent for a similar living space (square footage wise) in your neighborhood? Is it less than $1,600, comparable, or more? The reason I am asking is because if you get rid of the house, you’ll have to live somewhere. If the rent is comparable or more, then the decision to save the house is easy. If the rent is significantly less, is it more or less than the interest payment? Remember that some of your mortgage payment also goes toward equity, so you’ll have to do the math. And don’t forget to add your property tax, then back out various deductions so that you have a more accurate comparison. If you are not comfortable doing this, you should consult a fee-based financial planner to help you with the calculation.

If it makes financial sense to keep the house then great, let’s try to keep it. If not, then you need to figure out if you can live with the extra cost of owning your house. Let’s assume you want to keep the house, there are many things you could do as I outlined in my how to avoid foreclosure article.

But before we get into the details, it’s imperative once you decided to keep the house to be determined to keep the house at all costs. Don’t think that you are trapped, but think about how you can break free. What can you do to save money or earn more money that you need? I have sections dedicated to making more money and saving more money on my blog that I’d like you to look at and go from there.

Be creative and have courage. And whatever you decide to do, good luck.

Ryan says: Stressed Out, you have done the right thing by looking at getting a mortgage modification. Shaving a couple points off your mortgage rate may save you a couple hundred dollars per month (if the bank is willing to modify your mortgage). You may also consider a; Lending Tree connects you with multiple lending companies who compete for your business. Best of luck to you and your family.


Published or updated January 19, 2012.
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{ 5 comments… read them below or add one }

1 Kristen

Here’s another option: Go see a HUD-certified housing counselor. Many non-profit agencies all across the country offer these services for FREE!! You can find a certified counselor in your area at the HUD web site (www.hud.gov). The counselor will go over the borrower’s whole financial situation, explore all the available options and give the client crisis budgeting tips. These counselors can work directly with lenders. Also, some states have programs to help those who are struggling with their mortgage. For Pennsylvania residents, in particular, the state actually has quite a few programs. These housing counselors will offer honest advice regarding your options.

It’s very important for anyone struggling with their mortgage to be aware that a great deal of scam companies are now out there charging people thousands of dollars up front while promising to help the struggling homeowner modify their mortgage. These companies take the money and then disappear, leaving people in worse shape then they were before. It’s the old adage: If something seems too good to be true, it probably is. If you find a certified counselor, they will give you honest advice.

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2 Miranda

I agree with Kristen. Also, check to see if you can get a refinance under Making Home Affordable. The equity allowance was just bumped up to 125%, so you might be able to get help — even if you are underwater. But you do have to have your loan serviced by Fannie or Freddie to take advantage of the program…

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3 Single Guy Money

I don’t think you should sell. The banks have way too many homes right now and they don’t want your house. I would work with them as much as possible and I’m sure they can possibly work something out for you.

One of the other points brought up by Larry, can you possibly rent out a room or two just to bring in extra income.

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4 DDFD at DivorcedDadFrugalDad

I am with Larry’s camp on this one . . .

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5 RB @ RichBy30RetireBy40

I’m hoping that whatever people can do, to just hold on and ride it out for the next 5-7 years. Now is obviously not a great time to sell. And if you must, then just let it go and allow your Bank to do a short sale and move on. There will be other opportunities, and don’t let this one get you down.

Best,

RB

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