Prior to this decade, most foreclosures involved prime rate loans, simply because other types of loans weren't as common. However, the new sub-prime mortgage products have created a housing price spiral that puts even prime-rate borrowers at risk. In addition, a recession could result in job losses that further endanger prime-rate borrowers.
Traditionally, families lost their homes because they experienced job loss, family illness, or other family emergencies that drained their finances. In this market, prime-rate borrowers with adjustable-rate mortgages are falling into foreclosure due to two primary factors:
- Falling home values
- Rising mortgage interest rates
With more prime-rate borrowers defaulting, lenders have become more willing to work with borrowers to save their homes.
Foreclosure Avoidance Options
If you're otherwise financially stable, but your home is at-risk due to these two factors, you may be able to save your home or avoid major damage to your credit if you do have to give up your home.
Before you receive a notice of default, contact your lender for help. Depending on your situation, you have several options:
Forbearance: If you are experiencing a short-term cash crunch, request a forbearance from your lender. This will allow you to stop or reduce payments for a few months while your situation improves. You may be required to make catch-up payments at the end of the forbearance, or the missed payments may be added to your balance.
Refinance: If your mortgage balance is currently lower than the value of your home, you may be able to refinance into a lower, fixed-rate mortgage with more affordable payments. You will not be able to get a payment as low as the teaser rate on your initial ARM, but a fixed-rate mortgage creates payment stability.
If your home is below the FHASecure loan limit and you meet other qualification standards, you may also qualify for a federally-insured loan to replace your current mortgage. To learn more about the program, visit the Housing and Urban Development (http://www.hud.gov/) website.
Short Sale: If you're upside-down in your home, which means you owe more than the home is currently worth, it's unlikely that you will be able to refinance. Instead, you lender may agree to a short sale. After approving the sale, the lender will usually accept the sale proceeds as payment in full even if they don't cover the entire balance owed.
Depending on your situation and lender, other options may also be available. Reputable lenders don't want you to lose your home and are now more willing to help you stay in your home. Don't wait until it's too late to stop foreclosure.