As a homeowner, the events that lead up to your potential foreclosure can be especially traumatic. To list a few nightmare scenarios, you could either be laid off, hospitalized, or facing divorce prior to an impending foreclosure. For relief, you may attempt to negotiate a loan modification through your lender. A loan modification describes a permanent reduction in your mortgage principal and interest rate that should result in an affordable payment. Be advised that your mortgage must actually be in default, before you will be eligible for a loan modification.
Mortgage Default
Your full mortgage payment is likely to come due on the first of each month. The payment due date will be attached to one 15-day grace period. You will be responsible for paying lat fees, if the lender has not received your regular mortgage payment by the time the grace period expires. After 30 days of missed payments, your mortgage falls into default and the foreclosure process begins with the pre-foreclosure stage. In pre-foreclosure, you may have as few as 150 days to arrive at a settlement with your lender, before your home is seized and auctioned off.
Loan Modification Package
Immediately after mortgage default, you should contact lender representatives and attempt to negotiate a loan modification. For affordability, your goal is to secure a loan modification that results in a monthly payment that is less than 30 percent of your gross monthly income.
Prior to making the phone call, you should put together a package of your recent bank statements, loan paperwork, and investment documents. The lender will analyze your finances for proof that you have exhausted almost all of your available resources in an attempt to stay current on the mortgage under its existing terms. This means that you should eliminate discretionary spending from your budget and liquidate stocks and bonds from taxable accounts — to raise cash for making mortgage payments, before seeking out a loan modification. You case for loan modification will be strengthened further if area property values have deteriorated and you owe more on the mortgage than your property is actually worth. At that point, the bank may consider writing down your mortgage principal to match the value of your home. Be advised that the bank operates to best meet its own financial interests and is under no obligation to approve of any loan modification proposal.
Pre-Foreclosure Sale
To open up your options, you should also put your home on the market while you attempt to secure a loan modification. To attract demand and expedite a sale, you should list the property at a 10 percent discount to comparable real estate. A prospective buyer may drive a hard bargain, if the property is in need of minor repairs because you lacked the funds for general upkeep. A pre-foreclosure sale is further complicated if you are upside-down on the mortgage and owe more on the property than your home is worth. You may then be forced into a short sale — where the bank must agree to accept less cash for the home than its outstanding mortgage due.
Foreclosure Auction
After 180 days of missed payments and no mortgage settlement, the bank will publish a notice of sale within the local newspaper. The notice of sale announces a time and date for your home to be auctioned off. In some cases, the foreclosure auction date will arrive within 30 days of the notice of sale. The bank may repossess the property as real estate owned (REO), if a buyer does not emerge with a winning bid at auction. Immediately after the auction, the bank or the home’s new private owner can file an eviction lawsuit to have you removed from the premises.