What To Do If Financial Trouble Hits Your Austin Home

Here’s the good news: Lenders and servicers don't like to foreclose on mortgages. Foreclosures cost more than can be made back, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders likely will work with them to bring the loan current. In order to do so, however, the owner must stay in communication with the lender and be honest about the financial situation.

The lender’s willingness to help with current problems will depend heavily on past payment records. If the owner has made consistently timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained chronic late payments.

For those falling behind in payments or who know they are likely to do so in the immediate future, they should contact the lender right away about meeting to discuss alternative payment arrangements.

The lender will ask for information about monthly income and expenses. Owners must use realistic figures based on their current financial situations. The lender will also ask about assets and liabilities, including all debts and monthly payments and when they are due. If the lender needs proof of income (pay stubs, unemployment check stubs, tax returns, etc.) he or she will let the owner know. Remember, lenders do not want to foreclose.

Lenders Oftentimes Can Help

An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again.

The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting “temporary indulgence.” An example of where this would be considered is a house that has been sold but the sale has not settled; another is a pending insurance settlement. The lender will want documented evidence, such as the sales contract, before granting indulgence.

Those who suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a “repayment plan.” This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a “forbearance plan” will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.

These plans represent last-ditch efforts by borrower and lender to keep the borrower in the home. They are not a substitute for good financial planning and likely will not be available if the borrower's payment record is poor. Lenders or servicers may work closely with good borrowers who are having a period of real emergency and hardship, but they are not inclined to cooperate with those who demonstrate little financial discipline.