The number of home foreclosures is at an all-time high. Unemployment rates rise as the economy worsens. Job loss, getting too deeply into debt, and buying a more expensive house than they can afford propel people into foreclosure. The rising popularity of loan products such as interest-only loans and ARMs allows borrowers to buy bigger, more expensive houses. An interest-only loan lowers your initial monthly payment for a set period of time, such as five to twenty years. During that time you make only interest payments and pay nothing on the principal, so after five years, you still owe the full amount borrowed. To pay off the balance in the remaining years of the mortgage, you have to pay a higher amount once the interest-only period is over. If you can't afford the higher payments, you may be headed for foreclosure.
If you fail to make your mortgage payments for ninety days, your lender will probably start foreclosure proceedings to take over your house and sell it to get back the money they lent you. If the house sells for less than you owe on it, they could sue you for the difference. Obviously foreclosure is a major black mark on your credit record and will affect your ability to obtain credit in the future.
Act Quickly to Prevent Foreclosure
If your financial situation is so critical that you're headed toward foreclosure, you're probably in an emotional state that includes feelings of anger, frustration, fear, and helplessness, but don't let these emotions keep you from taking action. There are things you can do to help prevent foreclosure. If you anticipate having trouble making payments, contact your lender immediately and explain your situation. Don't wait until you've already missed a payment. Your lender may be willing to come up with a new payment plan that takes your current situation into consideration. You may be able to refinance the loan, extend the term, or spread the missed payments out over several months. If you have an FHA mortgage, you may have other alternatives as well. Your lender doesn't want to foreclose, but the lender can't work with you unless you're willing. You may be embarrassed and ashamed and may even try to keep your spouse in the dark about the situation, but if you wait too long you'll have ruined your chances of resolving the problem.
You may find lower refinancing interest rates than your current lender advertises, but don't rule your lender out without talking to your loan officer. Sometimes banks and credit unions will waive certain fees or offer a slight rate discount for current customers.
You Do Have Alternatives
If worst comes to worst, you can protect your credit by holding a preforeclosure sale, during which you live in the house while you go through the process of selling it to pay back the lender. A second option is a deed in lieu of foreclosure, where you give the house to your lender and the lender sells it to get its money back.