Have Income?  Facing Foreclosure? 

Even if you are okay with letting go of the house, it makes sense to consult an attorney.  Here is why.

There may be serious implications from the foreclosure.  If you have a second lienholder and that loan was created as a result of a refinancing, it is very likely that you will be sued for any deficiency on that loan.  These suits are filed by companies, which purchase the debts from the original mortgage lenders.  They are in the business of buying up that debt for pennies on the dollar and going after the debtor for recovery.

Obviously, the debtors can't afford to pay back $100K+.  If they could, wouldn't they have kept their home?  In most cases a suit such as this happens several months after foreclosure and it can be a crushing financial blow.

Here's the problem.  In some situations, prior to the foreclosure a household with income exceeding the California Median could have used the deduction of that mortgage payment (even if no such payments were actually made, even if debtor does not wish to keep the home) and often enough that deduction can make a difference between qualifying for a chapter 7, liquidation bankruptcy versus doing a 5 year repayment plan.  The difference can be excruciatingly clear and painful.

You can file a Chapter 7 bankruptcy, eliminate the unsecured debt, including any deficiency on the second mortgage and wipe the slate clean OR have a foreclosure and if provided there are no other possibilities (such as an affordable settlement agreement) or some other way of paying the debt off, the debtor will be pursued for the difference and may be forced to endure a 5 year Chapter 13 repayment plan.  Either way, you have much more negotiating power with the lender while the door to chapter 7 is still wide open.  

Individual results vary depending on other circumstances.  So, please, consult an attorney when you get your default notice just to get the facts.  Have your financial situation evaluated.  See where you stand before and after the foreclosure.  A good attorney will not pressure you into bankruptcy.  A good attorney will discuss options and provide with information so that you are able to make choices that are right for you and your family.

~ Kathryn U. Tokarska

When Foreclosure Threatens: Can You Afford to Keep Your Home?

If you face foreclosure, realistically assess whether you should keep your home.

If foreclosure looms because you’ve missed some payments, or you think you will soon, it’s time to face what’s probably the toughest question of the whole process: Can you afford to keep your house?

Apart from the emotional considerations that surface whenever a foreclosure is threatened, there are economic factors you just can’t ignore. Before you can decide whether or not to try to keep your house, you need to take stock of your financial situation -- which has no doubt changed since you bought your house.

Here are the basic steps:

• determine if you have equity in your home
• decide if you can afford your monthly mortgage payments, and
• reduce your debt load.

Do You Have Equity in Your Home?

To a large degree, your options depend on whether you have equity in your house. Generally, your equity will be the difference between what you owe on the house and what you can sell it for. Unfortunately, many homeowners have negative equity -- that is, selling your home would get you less money than what you own on your mortgage and other home loans.

What Is Your House Worth?

These days it’s not so easy to know what your house is worth. Estimates of real estate values are traditionally based on the amounts that similar houses in the neighborhood have recently sold for. To find out that information, check out websites such as  www.Zillow.com or www.housevalue.com. Local real estate brokers and agents can also give you an estimate by looking at similar sales in your neighborhood.

Unfortunately, as property values continue to decrease, it becomes next to impossible to determine the value of your property, especially if no houses in your neighborhood are selling. Or, if there are many foreclosures going on in your community, a house similar to yours may sell for far less than if you sold it outside of foreclosure. The only real way to find out your house’s market value is put it up for sale and see what happens.

Deciding Whether to Try to Stay or Go

If you have some equity in your house, it’s probably worth it to try to hang on to your house, if you think you can afford future monthly mortgage payments (see “Are Your Monthly Payments Too High?,” below, for more on this). If you can’t afford the payments, see if you can reduce your debt load so that you can make them (see “Can You Reduce Your Debt Load?,” below, for ideas on how to free up more of your income or change the payments themselves).

If you find yourself significantly upside down (negative) when it comes to equity, and you are behind on your mortgage payments, there’s not much point, from an economic perspective, in trying to keep the house. What is significantly upside down? It probably makes sense to give up your house if its current value is 25% less than what you paid for it. That’s because your house’s value would have to appreciate by as much as it dropped for you to come out even, and that will likely take several years.

However, if you are upside down on your home and still want to keep it, you might be able to reduce your mortgage payments by working something out with your lender or taking advantage of a favorable refinanced loan under the HOPE for Homeowners Act of 2008. (See, “Can You Reduce Your Debt Load?” below, for more on this.)

Consider the Real Estate Market

If you are upside down on your mortgage or have little equity in your home, take stock of the real estate market before making your decision to keep or walk away from your home. If the market is slumped, and appears to stay that way for some time, your best option may be to let your home go. If the real estate market appears to be perking up (meaning prices may rise quickly), it might make sense to try to keep your home even if you have negative equity.

But how to know what the market will do in the future? Even if the market is a bust, judging by history, home prices will ultimately rise again. As Mark Twain is reputed to have advised a young man, “Buy land! God isn’t making any more of it.” Of course, knowing when prices will rise is the key question.

No formula can predict how soon a particular real estate bust will be over. But watch for signs that the market is either improving or stagnating. If some or all of the following factors are present, there’s a good chance the market is not headed for a speedy recovery:

• a collapse of the subprime loan market
• high numbers of foreclosures predicted to continue for a year or two
• an accelerated decline in residential real estate values
• an overall tightness of the credit markets
• a high likelihood of recession, or
• consumers who are tapped out and increasingly unable to make good on any of their debts, mortgages included.

Remember, there is no guarantee that your house will ever recover its original value. As the old saw goes, you don’t want to throw good money after bad. If the housing market doesn’t rebound quickly, every sacrifice you make now to keep your house could be for naught if you ultimately lose it.

Are Your Monthly Payments Too High?

Many folks face foreclosure because their income has substantially decreased since first buying their home. Some were counting on the house’s value to increase, allowing them to replace an unfavorable mortgage with a more affordable one. Regardless of the reason for your troubles, before you decide to try to keep the home or move, you must determine if you can truly afford your current loan, or a refinanced loan. If you can’t, it may be time to let your home go.

There are several good ways to make this determination. Choose the one that works best for your situation, or use a few methods.

Use the Standard Ratios

As a general rule, the housing industry considers a loan affordable if your overall monthly mortgage payments do not exceed somewhere between 29% and 33% of your gross monthly income. This is frequently called your income to mortgage debt ratio. For example, if your annual gross income is $75,000, then your mortgage payments should not exceed $2,062 if you use the 33% figure. They should not exceed $1,562 if you use a more modest 25% income-to-mortgage debt ratio.

You should tailor these numbers to your particular situation. If you have a child with special needs or two kids in college, for example, your mortgage payment might not be affordable even if it’s below the recommended 29-33% income to mortgage debt ratio. On the flip side, if you have few other expenses (perhaps you live simply, don’t own a car, or grow some of your own food), you might be able to afford a mortgage payment that exceeds the 29-33% figure.

Use an Online Calculator

The Internet is chock full of calculators that purport to tell you how much house you can afford. They’re very easy to use, but use caution -- they may make some assumptions that won’t work for you. Here’s a few to try:

• Nolo’s mortgage affordability calculator.
• CCN Money calculator at http://money.cnn.com (click “Calculators” at the bottom of the page to find the home affordability calculator).

To find other affordability calculators, go to www.google.com and type “home affordability calculators.”

When using these calculators, remember that the housing industry used them to determine what size loan you qualify for. They may be somewhat dated given the current chaos of the mortgage and credit markets.

Make a Budget

Another way to determine if you can afford your mortgage is to make a budget. Take a no-nonsense look at your income and expenses and see whether there is room in your budget for your current or projected mortgage payments. If the numbers don’t add up the first time around, see what you can trim. The recently enacted HOPE for Homeowners Act of 2008 may also help some homeowners refinance their mortgage with a more favorable loan. The Act created a program designed to help homeowners who are considered to be at-risk for foreclosure. Homeowners who qualify will be able to refinance their currently unaffordable variable rate mortgages into affordable 30-year fixed rate mortgages insured by the Federal Housing Administration (FHA), if their lenders agree to participate. 

You can also try to reduce your overall debt load through bankruptcy.

Finally, sometimes it is possible to stop paying your second or third mortgage -- thereby allowing you to afford your first mortgage.

Letting Go of Your Home

If you determine that it no longer makes sense to keep your home, take heart. Although it’s always painful to give up a house, keep in mind that doing so may make things much easier for you and your family in the long run. Also, if your house is subjected to a foreclosure sale, you will probably be able to stay in the house for months (in many states) without making any more mortgage payments -- giving you time to save some money to move and secure new housing. 

For a comprehensive guide on foreclosure, including what to do if it’s inevitable, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).