Facing Foreclosure? Don't Wait to Seek Help
Over the past few months, I have met with many clients whose mortgages are in arrears or who have just been served with a foreclosure lawsuit. If you are in danger of falling behind on your mortgage, or if you are already delinquent, it is important to know what your options are. Usually, the faster you move, the more choices you will have about your financial future.
The combination of higher mortgage payments caused by variable interest rates, rising utility costs and a slowing real estate market are forcing more and more people to choose between paying one creditor over another. Often, a homeowner in financial distress will fall behind one month with the thought that he or she will catch up the following month. He often finds that his mounting debt only compounds an already stressed financial situation.
Generally, the trouble starts as soon as you miss your first payment. Although you may not be contacted immediately by your lender, most lenders will report a missed or late payment to the credit bureaus, which can have a devastating impact on your credit rating. Additionally, a missed or late payment allows a lender to charge you late fees and default rates of interest that you agreed to in your loan documents but of which you are probably unaware.
By the second month of delinquency, your lender will likely contact you in writing and on the telephone. At first you may try to dodge these calls, but the phone calls will increase in persistence, adding to your financial and emotional distress. After the third month of non-payment, the lender will likely refer the matter to a local attorney to commence a foreclosure action against you. Now, in addition to the fees described above, you will be obligated to pay the lender's reasonable attorneys' fees in pursuing the foreclosure.
Although there are statutes in Connecticut that provide some protection from foreclosure to individuals who meet certain criteria; in my experience, the best approach is to strategize a solution rather than defend the foreclosure. If you can work out a solution with the lender quickly enough, you can contain or even avoid serious damage to your credit. As soon as you know you will miss a payment, you should contact your lender's loss mitigation department.
Lenders may offer a variety of solutions for people who have fallen behind on their mortgages; these include:
- Temporarily reducing or waiving payments
- Setting up short-term repayment plans to help you make up the deficit
- Adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount
The solution will depend on your financial status, your default status, as well as the type of loan you have with your lender. Early action, however, will provide you with the best opportunity to protect your credit score and avoid foreclosure.
As soon as you know you are in financial distress, you should make a budget. Sketching out a plan, including expected income and expenses, will give you a complete picture of your situation. You may have to pay minimums on credit cards or cut non-essential expenses for a few months. If after reviewing your budget, the picture is too overwhelming, you may need to seek professional help, such as a credit counseling service.
Another option to consider is selling your house privately. If you can't sell your house for what you owe, but you are not too far in arrears with your lender, you may be able to provide your lender with a deed in lieu of foreclosure. This option might keep you from having to pay any deficit that might be owed on the property. Lenders cannot be forced to accept a deed in lieu of foreclosure, but this is an option to explore if foreclosure appears imminent and other options have failed.
If you owe substantially more on your home than it is worth, you may be able to get the lender to accept less than they are owed by negotiating a "short sale." Essentially, you sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit. There is a downside to this strategy. A short sale can further damage your credit scores, often showing up as a "settlement" that indicates you paid less than you owed. You may also face an IRS bill on the unpaid debt, which is generally considered income to you. An experienced attorney who is also a skilled negotiator might be able to help you avoid these consequences or at least minimize them.
Finally, you may decide to just let the foreclosure go through and take action to protect the equity, if any, in your property. In a foreclosure, you are entitled to receive the proceeds in excess of the debt and costs that are realized from the auction of your property. Since a court will determine whether the property is sold at auction or simply transferred to your lender after determining its value, you should obtain an appraisal of your property and compare that appraisal to your lender's before the court enters a judgment against you. The assistance of counsel in this process can help you protect your interests.
In sum, there are several options available to you during a time of financial distress. Do not delay in the hope that things will simply get better. Seek good advice, come up with a strategy and be proactive.
###Vincent M. Marino is a member of the commercial litigation group at Cohen and Wolf, P.C. Attorney Marino practices in the areas of commercial litigation, construction litigation, municipal law and bankruptcy and has served as the Town Attorney for the Town of Orange since January 2006. He can be reached at firstname.lastname@example.org
Cohen and Wolf, P.C. is a full service law firm with offices located in Bridgeport, Orange, Danbury and Westport.