First of all, remember that if you’re in danger of falling behind on your mortgage payments it’s best to be proactive and move quickly to resolve the situation. If you act early, you’ll face fewer consequences financially and emotionally. Delaying and ignoring the reality of the situation will only make things worse for you.

Most mortgage loans are due on the first of the month and the borrower typically has a grace period of 5 to 15 to make the payment without a penalty. After this grace period most lenders impose a late fee that’s typically 3 to 5% of the missed payment. Some mortgage lenders have gotten more aggressive in calling home owners during this period over the past year. They’re doing this to head off potential problems down the road and to get a feel for the borrower’s financial situation. Naturally, it’s best not to be late on payments simply to avoid the late fee. These fees can add up and hurt you financially, especially if you’re struggling.

At 30 days past due, the problem becomes more serious because the mortgage lender will report you to credit reporting agencies as being delinquent. This single report can drop an excellent credit score to a below average credit score although some evidence suggests that credit scores that are already average and below average as less affected by this. This black mark on your credit score will make it more difficult to qualify for new loans, including a refinance on the home. It will also make other loans, like auto loans, much more expensive.

Also, at 30 days, you will begin to get calls from the collection department within the mortgage lender’s organization. Their typical home loan relief option is for you to make your back payment and current payment now. If you’ve faced a temporary financial set back, such as a short job loss, natural disaster or medical expense, and you will be financially able to get caught up, this is the point where you might want to consider working out a forbearance agreement. This agreement will allow you to get caught up on the missed payment over a 3 to 6 month time frame while stopping the foreclosure timeline. Of course, if you don’t meet the payment commitment, the lender will probably move more quickly toward foreclosure.

The payment negotiation period typically ends after 3 mortgage payments are missed, roughly 90 days. However, some lenders have let this go for longer periods given the current state of the real estate market and general economic conditions. But the negotiation period ends when the mortgage lender files a “notice of default” with your local courthouse. They will send you a certified letter, usually from their law firm, stating that the the foreclosure process will begin unless you make good the missing payments plus late fees and legal fees, typically within 10 business days.

At this point in the foreclosure timeline you should have already contacted the loss mitigation department of your lender. Depending on the lender and the type of loan, they may be able to offer you loan modifications, longer term forbearance agreements and other ways to avoid foreclosure. If your financial situation won’t be good enough to avoid foreclosure, you can still negotiate slightly less damaging alternatives such as a short sale or deed in lieu of foreclosure. Once the legal notice is filed, most lenders become a bit more hard nosed since they’ve had to pay a law firm so it’s quite important for you to try to work out something before things get to this state.

Another thing that happens at this point in the foreclosure timeline is that the borrower’s credit score is further damaged. Public notices like a notice of default are picked up by credit bureaus and this will depress credit scores to the point that getting almost any loan is impossible.

Since the notice of default is a public notice this will also bring a slew of scammers and opportunists to your mailbox, phone and even to your home. You’ll get all kinds of offers to ‘help’ you out but most of them will be dishonest to one degree or another. Be very wary of entering into any kind of buy back or foreclosure prevention program, especially if they involve you making payments to a third party or signing over the deed to your home.

After the notice of default, the borrower typically has about 90 days to make up the payments and fees in full. In states where non-judicial foreclosures are used a “notice of sale” is presented to the borrower, once again from the lender’s law firm, and this notice is made public as well. This means that the house will be sold at the next available legal sale date in that state or locality, usually 15 to 30 days after the notice. In judicial states, the process is often different but will follow a common time line. In this case, it’s best to consult a local foreclosure attorney to get an understanding of a particular state’s legal procedures and foreclosure timeline.

Lastly, you can halt foreclosure prior to the sale date if you bring the loan current and pay fees. For most people in this dire financial situation it’s not possible but some people have been able to do this. Some lenders will delay the sale and reinstate the loan if a substantial portion of the payments owed are paid and an agreement is struck to pay off the remaining fees in a short time. Others may delay the actual foreclosure pending the closing of an approved short sale deal. Others won’t do this. Of course, foreclosure can be also delayed by filing a lawsuit against the lender or declaring bankruptcy but these are basically stalling the inevitable and only put off, and don’t stop, the foreclosure timeline.

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When it comes down to it,  banks made it far too easy during the past few years for homeowners to take money out of their homes with home equity loans and subprime mortgage refinancing.  This was OK as long as the economy was OK and property values kept rising. Unfortunately this was an economic bubble and resulted in the fall we’re seeing now. Now home values are plunging and many homeowners now have inflated mortgages and home equity loans paired with an under valued home. The truly unfortunate part of this situation is that many homeowners can no longer afford their mortgage payment.  These people are facing the very real possibility of forclosure. For them, losing their family home is a very real threat.

Fortunately, the good news is that many banks that made these questionable loans have begun to  realize the economic realities of the current economic recession and are now giving homeowners several options to solve their mutual problem with bad home loans.

Obviously, the best solution would be to catch up your mortgage and then to make your home loan payments on the agreed upon schedule.  Sometimes banks will allow deferrals, make-up payments and other programs to allow you to get caught up and these are on a case-by-case basis. There are also possible state and federal programs that may allow you and your bank to ease into a home loan solution that fits your particular needs. You will need to check with your bank to discover what these options may be in your individual situation. Just remember that the mortgage company is not the enemy, they want a win-win situation if at all possible. They are willing to help you out in most cases although you may have to talk to several people until you find someone in the right department to work with you on your situation.

In some cases, banks will renegotiate a home loan. Some banks are more inclined to do this than others so you will need to check with the past due loan or the loss prevention department at the bank. Always stay in communication with the bank so that you will be in a good position to take advantage of home loan modifications that may be available to you. On the flip side, some banks won’t negotiate for various reasons so be prepared for other options if this won’t work for you.

One option that is being offered by home loan banks is called a short sale. In this scenario the bank permits you to sell your home at or below the current market value. This allows the home to sell quickly, regardless of what is owed on the home loan.  For example, let’s say that your mortgage is $480,000, but currently comparable  homes in your area are selling for $390,000. If the bank permits you to do so, you can accept an offer for $390,000. It is possible that you could take even lower bids. In turn, the bank will take a loss on the sale of the home because the sale will not cover the full mortgage loan amount, but the bank will not be stuck with a home they don’t want in their inventory.  So far as the homeowner goes, in most cases they will be able to simply walk away after the sale and be free and clear of the original home loan.

To effect the short sale of your home, I suggest that you engage the services of a professional real estate agent who is knowledgeable about short sales and has had some experience and success with these kinds of sales. It is in your best interest to bring in a professional to help you with this because they will know proper way to handle the paperwork involved and other details. Also, since they won’t be emotionally involved in the sale they can offer a practical view of the situation to all parties involved.  Remember that in most cases that the bank that holds the home loan will end up paying the realtor fees.

There are disadvantages to a short sale. Yes, your credit score will suffer although it will not be as bad as it would be with a foreclosure of bankruptcy.  It has been estimated that your FICO score can drop 100 points with a short sale.  But compare this to drop of over 200 points with a foreclosure or bankruptcy. Also, with a short sale, you will not be able to buy a new home for at least 2 years. For a foreclosure or bankruptcy this can be at least 3 years if not much longer.

Bankruptcy is the final solution that might allow you to stay in your home. You will still need to catch up payments and stay current on your payments if you do a Chapter 13 bankruptcy. This will damage your credit but you won’t lose your home if you are able to make your payments.

Lastly, there is foreclosure. Sometimes this will happen in spite of your best efforts to avoid it. Should this happen to you be prepared for some struggles but stay strong and avoid taking on any new debt for several years. Save your money and, with any luck and the passage of a few years of time, you will be able to find a new home to purchase. Just don’t make the same mistakes again.

I hope this article has helped you with your questions about foreclosure prevention.

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Remember that mortgage lenders are generally willing to work with homeowners to find a solution to avoid foreclosure if a feasible repayment plan can be worked out. In a forbearance, the lender agrees to temporarily cut or suspend mortgage payments until the homeowner can start paying a full mortgage payment again plus making up the missed payments.

A forbearance is typically only a viable option if you can show certain types of hardships that your lender approves of and that your income is expected to return to normal in less than 6 months, on average. Remember, a forbearance won’t help you if you’re have purchased a home that you can’t afford. In my experience, managing a forbearance is only possible if your regular payment amount is less than 30% of your monthly take home pay. Since loans are often made for more than this it may not be possible for a forbearance plan to work for you. In that case, you should pursue different options.

In order to grant a mortgage forbearance, mortgage lenders want to see that the delinquency was caused by an unexpected financial circumstance such as illness or injury. Some will accept a job loss as long as it’s a temporary situation. Surprisingly, few lenders will accept natural disasters such as a fire, flood or storm damage as a reason for a forbearance. The reason for this is that the property isn’t inhabitable and this increases the chance that the homeowner won’t continue to make payments. Beyond just the reason, the mortgage lender has to be assured that the borrower has a sound and reasonable plan to return to fiscal stability and can be relied upon to stay current on their mortgage payments afterward.

To begin a mortgage forbearance you should get in contact with the lender’s loss mitigation department. A customer service flunky or a collections agent won’t be able to help you with this. It is important that you take complete and careful notes about your interaction with this department. Stay polite and calm while you speak to them and in any written communication with them. It’s best to begin by asking for a homeowner’s assistance package or a forbearance agreement application. Sometimes the lender’s representative will ask you for details on your situation in writing although some will take a statement over the phone.

In general, most lenders will be willing to enter into a forbearance agreement if there are 3 or fewer delinquent payments on the the account. If  there are more, it is quite rare for them to negotiate an agreement. If you aren’t behind on your mortgage, then it is unlikely that they will be willing to negotiate an agreement with you until you are actually behind on payments.

A forbearance agreement generally calls for the borrower to pay back the loan delinquency within 3 to 12 months, usually by making an extra 1/2 payment each month including interest and late payment fees. Sometimes lenders will remove late payment fees but sometimes not, however, it doesn’t hurt to ask about this. Occasionally, they will tack on an inspection or appraisal fee. They will do this to insure that you’re still occupying the home and that the property hasn’t been abandoned. Lenders generally prefer a gradual repayment plan instead of a lump sum payment although some may accept this if the source of the funds can be verified. It is almost unheard of for a lender to extend the pay back time for more than 12 months so make sure any proposed repayment plan fits well within this timeframe.

Make sure that you carefully read any forbearance agreement you receive from the lender. If you’re unsure about any part of it, consult with the lender and with an attorney. Some lenders will try to sneak in additional terms and conditions that may cause you difficulty.

It is important not to abandon the property while you’re working under a forbearance agreement. Not only does this indicate to the lender that you’re likely to default on the loan, it may also disqualify you from tax advantages as well as government programs intended to help distressed homeowners.

Of course, a forbearance agreement will only work if you’re on solid financial ground where you will be able to overcome a temporary financial setback. If this isn’t true in your case you should examine other options that are more drastic than a forebearance.

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