This one is from the heart. This time it’s not about statistics or interest rates, buying or selling, or economic forecasts. This one is about good people losing their homes. The most difficult part of my job is when a homeowner who works hard and cares about their family, comes into my office and tells me that they are in trouble. Sometimes I can help and sometimes I have to look them in the eye and explain that they are heading towards a foreclosure.
A foreclosure is basically when a homeowner can’t afford to pay their mortgage. After three missed payments the bank will issue a notice of a default and set a foreclosure date. Typically it takes six months total for the bank to complete the process and repossess the house.
The slippery slope towards a foreclosure usually starts when someone has financial troubles and can’t afford their payment. The typical reasons for someone foreclosing are job loss, medical disability, or divorce. More and more these days we’re seeing another problem. Folks whose short-term loans are adjusting are seeing their payments go up significantly, sometimes as much as $1,000 or more per month. When this happens people have the choice of making the higher payment, refinancing into another fixed rate loan that they can afford, or selling the house.
Unfortunately you need equity in your home to refinance or sell. In a market where property values have been sinking like stones, many people owe way more than their home is worth, making a refinance or sale impossible.
So what to do? I’ve seen the stress of this situation on many faces, heard it in their quivering voices. I’ve seen people who can’t sleep at night and the strain on their family relationships. The need for shelter is one of our most basic human needs. When that need is threatened it’s a terrible feeling. However I’ve found that fear of the unknown makes hard times that much harder. I can alleviate some of those fears by explaining people’s options and exploring the best and worst case scenarios. I hope it makes people feel better. The human spirit is amazingly resilient, and people are quick to wrap their minds around what is happening and start feeling hopeful for the future.
When a homeowner goes through a foreclosure their credit goes in the tank. A foreclosure stays on a credit report for up to 10 years. The good news is that if someone works diligently towards making all of their payments on time and repairing their credit, they can qualify to buy a home through a FHA loan in 3 years or a conventional loan in 4 years. I believe that the standards and practices of the industry are going to adjust to what’s happening in our economy. Just the other day a lender representative came into my office and told me about a new purchase loan that people can get only 1 year after a foreclosure. There also could be personal liability issues that you may want to talk to an attorney about. The good news is that many people are pooling their resources with friends and family members to buy a home immediately, benefiting from this amazing purchase market.
There are also tax consequences to foreclosing. Of course I’m not a CPA, and I suggest that you consult a qualified tax professional. The IRS can issue you a 1099 for the difference between what you owed on the home and what it eventually sold for after a foreclosure. Ouch. The federal government passed a debt relief plan that may soften that blow but this won’t help if you’ve taken money out of your home by refinancing or if it’s an investment property.
So if you find a foreclosure is inevitable think of it like this; if you can’t afford your bills it’s probably super stressful. You’re probably trying to work overtime, get a second job, depleting your savings, trimming expenses, and even going further into debt living off your credit cards. Maybe you’re paying $3,000 a month on a loan that adjusted and you have no chance of refinancing. You owe $350,000 on your loan and the home is only worth about $225,000 in this market. It might take 5-7 years until the market swings back to where your home appreciates enough just to break even.
You probably could rent a similar house to yours, in the same neighborhood for $1,500 a month. You’ll still make the same paycheck at work and your quality of life won’t change at all. That’s $1,500 a month that you’ll be able to put in your pocket, replenish savings, pay off credit cards, and invest. If it takes 36 months before you can qualify for a home purchase again, that equals $54,000 of hard-earned dollars that can go towards a down payment or a safety net.
Now let me be very clear about this - I am not telling anyone to foreclose or suggesting that it is an easy out. I’m just demystifying the worst case scenario and trying to offer comfort. There are some options we can explore before reaching that point; the Federal Housing Authority has some great refinance loans even when equity is limited, your lender might agree to freeze your interest rate, or you can even try to negotiate a short sale of your property. However if none of this works it’s not worth jeopardizing your health, happiness, and relationships in order to try and keep your credit intact. Sometimes you lose the battle but still can win the war.
I am committed to helping you. I can’t always solve the problem but we can map out your options together and figure out what’s best. This wave of foreclosures won’t last forever, and the sooner this band aid is ripped off the sooner the market will stabilize and we’ll move on to better days.
These are hard economic times. There’s no denying that. I also believe that this is the time to realize how blessed we are and prioritize what’s important in our lives. Every day we can choose to focus on what we can control - to be closer to the people we love, help others in need, slow down, and smile more. This too shall pass, but hopefully we all learn that we are defined not by what we drive or how big our house is, but how we make others feel and if we leave this world a better place than before we were here.
