Buying a house is a dream for many people, and not terribly difficult with today’s low interest rates. Things happen in people’s lives that can cause them to miss house payments or not be able to make their house payment. A lot of people panic and ignore the problem, but the bank will not ignore the issue. The best thing you can do when you get into trouble is talk to your bank, a real estate agent, an attorney, and an accountant. Missing mortgage payments will hut your credit, and make it very tough to get new loans for anything. If you miss too many payments, the bank can take your home by foreclosing. If you lose your home, or hurt your credit, it can even make it tough to rent a home, because potential landlords will see your financial problems and not want to rent to you. The sooner you figure out a plan to save your house, sell it, or restructure your loan, the better off you will be.
The first step to avoiding missing house payments is to be smart when you buy a house
When you start the house buying process, one of the first things you should do is talk to a lender. The lender will tell you how much of a loan you can get, and how much you should pay for a house. The lender will tell you the maximum amount you can qualify for, but that does not mean you should get a loan for that much. I believe that getting a house loan for the most you possibly can is asking for trouble. It makes it hard to save money, and you must be very careful with your finances. Many people have a hard time saving money in the first place and adding a large house payment makes saving even tougher. Here is an article that goes into more detail on how much to spend on a house.
Another thing that most people do not do is save for an emergency fund. Most financial experts suggest you save at least 6 months worth of living expenses in case you run into unexpected expenses, lose your job, or have some sort of emergency. If you have an emergency fund and run into financial trouble, you can use that fund to make your house payments. Hopefully in 6 months or less you can figure things out and get back on track.
What happens when you miss your house payments?
Most mortgage payments are due on the 1st of every month, but they are not considered late until the 15th of the month. If you get your money to the bank by the 15th, you should be fine. If you pay after the 15th, the bank can charge late fees. If you are more than 30 days late with a mortgage payment it will start to affect your credit. In fact, one mortgage payment that is more than 30 days late can drop your credit score 100 points! Multiple late payments can drop your credit score even more. Late fees can add up to be hundreds of dollars a month, making it even harder for a homeowner to catch up.
If you miss enough payments or fall far enough behind on your mortgage, the bank can start the foreclosure process. A foreclosure is when the bank takes possession of your home. Foreclosure laws vary in every state, but it can take as little as a few months to lose your house in some states or as much as 3 years to lose your house in other states. This is one reason to talk to your bank, real estate agents, or an attorney as soon as possible. Some states even have resources for people who are in foreclosure that give free legal advice. There are also many companies that charge a lot of money to help people in foreclosure. Most of these companies will not help you, and most information should be free.
Why is it best to talk to your bank as soon as you miss a house payment?
When you are late with a payment, the bank will call you to see what is going on. Many people ignore these calls and hope the problem will go away, but that never happens. The bank does not want to foreclose because it costs them a lot of money. They have to pay lawyers to complete the foreclosure, and they often lose money because the house sells for less than the loan amount. The government also puts a lot of pressure on banks not to foreclose. They encourage banks to offer loan modifications and short sales before the banks foreclose.
If you miss house payments due to a financial hardship, the bank may be willing to modify your loan. The loan modification could reduce your payment, roll late fees into the loan, or even reduce the balance you owe so that you can make your payments. There is no guarantee the bank will offer a loan modification, but it is a possibility. The bank may also offer the borrower a short sale, which means the homeowner sells the house, but pays the bank less than they are owed. A short sale is much better for your credit than a foreclosure, but still hurts it. Some banks will even pay homeowners to complete a short sale! When you complete a short sale, you may have some tax consequences because the bank is forgiving debt. Forgiven debt can count as income, which you must pay taxes on. This is why you need to talk to an accountant or attorney when you start to miss house payments.
Why should you talk to a real estate agent when you get behind on house payments?
When you want to sell your house you need to talk to a real estate agent to figure out what it is worth. You should do the same thing if you fall behind on your payments. The agent can tell you how much your house is worth and what all the costs would be to sell the house. Even if you do not plan to sell, it is good to have a backup plan in place. If you have enough equity in your house, you should be able to pay the real estate agents, sell your house, and move on. If you do not have enough equity in your house, you may want to consider a short sale.
A short sale is a lot of work. The bank will want financial records for the last couple of years to prove that you are in a financial hardship. They will not allow a short sale just because you are behind on payments and the house is not worth enough money to sell. A short sale is a much better option than a foreclosure in most cases.
What happens if your house goes through foreclosure?
If you fall behind on your payments, the bank can foreclose on your house. How fast that happens depends on what state you are located in. In some states homeowners can be foreclosed on in a couple of months and in other states it takes years. In Colorado the foreclosure process takes about 6 months.
Once the house is sold at the foreclosure auction, the bank now owns the house (unless a real estate investor bought the home at the foreclosure sale). The new owner of the home cannot kick out the previous homeowner right away. They must go through an eviction or come to an agreement to get the previous owner out.
If you get foreclosed on, you do not have to move out right away. Legally you can stay there until you are evicted or come to an agreement with the new owner. Many times the bank will even pay people cash for keys to vacate the home. The banks do not want to evict people and they may pay the occupants a thousand dollars or more to move out in 30 days. I list foreclosures for banks so I am very familiar with how the system works.
When the house sells at the foreclosure auction, the previous home owner may even get some money back! The bank is paid the loan balance, late fees, and attorney fees. If the home owner owed $50,000 on their loan, they might also owe an additional $10,000 in late fees and attorney fees. If the house sells for $100,000 at the foreclosure sale, the previous owners would get $40,000 back.
There are also times when the bank will make a deficiency bid on a house. That means they bid less than the amount they are owed. If the house sells for less than what the bank is owed, the deficiency amount may be considered forgiven debt as well. This is why it is very risky to let your home go through foreclosure. It is very important to talk to an accountant or attorney to learn how the forgiven debt could affect you. It can affect real estate investors more than owner occupants.
If you get behind on your house payments, do not shut yourself off from the world. Talk to your lender, talk to a real estate agent, and talk to an attorney or accountant. The sooner you figure out a plan, the better off you will be financially. If you end up going through foreclosure it can take three years or longer before you can buy a house again. A short sale is a better option, but can still make it very hard to buy homes in the future. If you buy a house that you know you can afford, and have an emergency fund, you will be much safer.