by Jamie Rider

Created on: January 01, 2011

What to do when your mortgage is in default

If you are overwhelmed because your mortgage is heading for the default cliff, know that you have options. Different homeowners face foreclosure for different reasons: unemployment, adjustable rate mortgages, predatory mortgages with high interest rates, or simply buying more house than they can afford. 

Whether you are seeking out a loan modification, looking to refinance, or just want to avoid a formal foreclosure in any way possible, it is critical that you be willing to act and be actively involved to facing the realities of your mortgage default.

1. HOPE for Home Owners

Find out if your lender is a participating lender. If they are, and you meet very specific criteria, you may be able to benefit from this government home-save program. In order to participate, start by contacting your lender. If your lender does not respond, there are a number of organizations that are members of HOPE NOW, an alliance of the affiliated homeowner assistance groups and the banks participating in the program.

2. Non-HOPE Loan Modification or refinance

If you have equity, loan modification or loan refinance is the place to start. It can also help to enlist the help of a lawyer to review the original terms of your mortgage. Banks will frequently be more inclined to return your calls and correspondence if a lawyer is involved. If the bank thinks they may be at risk for a lawsuit for unfair lending practices, they may be more inclined to allow a loan modification.

This is where some of the nonprofit and not-for-profit members of the HOPE NOW groups such as ACORN Housing and Neighborhood Assistance Corporation of America can come into play as well. These professionals can help improve your chances of receiving a loan modification or a mortgage refinance.

3. Ask for a mortgage forbearance

If a temporary event caused your mortgage delinquency, such as a brief stint of unemployment, find out if your lender will consider a forbearance. In a forbearance, the lender accepts the fact that you are behind and rolls that sum back into your mortgage. You then resume your normal monthly payments or a payment programmed to eventually "catch up" the sum of the forbearance.

 4. Consider "selling out"

If you have equity, a straight sale at a market adjusted price that pays off your mortgage may be your safest exit strategy. If you are "upside down," meaning you owe more than the market value of the property, you can contact your lender and a real estate agent who is a short sale specialist. A short sale occurs when your bank accepts your selling the property at less than what you owe, with the entire sum going to the bank in lieu of your mortgage debt. 

5. File bankruptcy

If at the end you find you have no other options left, consider filing Chapter 13 bankruptcy. You can do this before or after foreclosure. Because you eventually pay your debts under Chapter 13, there is a good chance you can keep your house so long as you do not fall behind on the court-directed payment plan.

6. Relinquish your deed-in-lieu of foreclosure

While you will still have a foreclosure on your record, the one advantage of deed-in-lieu of foreclosure is that you will not face the additional attorney fees the bank may claim as part of the foreclosure process. This is truly the last resort.

Nationwide, there is a record number of default mortgages. Be part of the work-out statistic by taking action, contacting your lender and reaching out to these other resources.

Learn more about this author, Jamie Rider.
Click here to send this author comments or questions.