The most important thing you can do to protect your home from foreclosure is to practice prevention. Some home equity lenders are in the business of foreclosing rather than the business of lending and are more than happy to give you a second mortgage that you can't afford or tack on extra fees and charges, so that your monthly payment is much more than you expected. Here are a couple of scams to be aware of:
- Stripping - These lenders rely on you to miss a payment on your second mortgage so that they can pursue foreclosure and sell your home for a profit. Never agree to a loan that misrepresents your income or has any blank spaces. You have a 3-day "right of rescission" period during which you can return the loan to your lender and cancel the contract. Use this time to look over your second mortgage documents very carefully.
- Packing - This is the practice of adding charges onto your second mortgage that you don't need and can't afford. These fees and charges can include credit life insurance, regular life insurance, and other "services." Most of the time these services are designed not to pay out and are not necessary, leaving you in the red if you can't make a payment on your second mortgage. If your lender mentions insurance or leaves any spaces on your loan application blank, refuse to continue with the agreement until you research what they're offering or they complete the contract.
- Flipping - Lenders who practice flipping are looking for people facing foreclosure on their homes already. They offer to refinance the mortgage and save your home. During the refinance, they tack on huge fees and then offer to refinance again when you cannot make your monthly payment. Each time they add more fees, so that when they finally foreclose you don't have any equity left in your home and owe them a huge amount of money. Be very careful when you are facing foreclosure if a lender, especially a no-name broker, makes you an offer that seems too good to be true.
Stop a 2nd Mortgage Foreclosure
If you are facing foreclosure already, your course of action on how to deal with your second mortgage lender depends on how much equity you have in your home right now.
- Plenty of Equity in Your Home - A second mortgage lender will be much more motivated to pursue foreclosure on your home if you have enough equity to cover both the first and second mortgages built up already. They are required to pay your first mortgage after the foreclosure takes place and will need that equity not only to recover their losses, but also to pay the first loan.
You should either sell your home and pay off both loans, with some equity remaining for you, or try to refinance and combine both loans, so that you only have one mortgage payment each month. Usually, your single payment will still be very large and it might be difficult to get a loan if you have already defaulted and your credit score has been affected.
- Very Little Equity in Your Home - In a situation where you don't have enough equity built up in your home to cover both balances, your 2nd lender will not be as interested in foreclosure. In this case, you may be able to get away with only paying your first mortgage until you get back on your feet and can get current with your second mortgage. You will be taking a risk though, because your second mortgage lender has every right to seek foreclosure when you default. They can also try to buy out your first mortgage so they have control of both loans, which makes it easier for them to foreclose.
You can try approaching your lender about putting your second mortgage on forbearance and making modified payments until you have your head above water.
Protect yourself and communicate with your mortgage lenders to avoid foreclosure. By making sure that you are only dealing with honest lenders, who are interested in repayment and not in taking your home, you will increase your chances that they will be willing to work with you in an unexpected situation.