One and one half million families in 2007 and a projected two and one half million families in 2008 are facing the problem of foreclosure because they are caught in a subprime mortgage that they were granted in spite of the fact that they had bad credit.
Easy credit seemed like the perfect solution at this time, especially when there was no down payment necessary and the initial rates were pretty attractive tickler rates.
Now that home prices are falling, and the reset rate on these adjustable rate mortgages are rising, many of these homeowners are facing real problems.
Some of these loans could have rates approaching 10%, which translates to over $2,000 on even a modest mortgage of $200,000. Now, adjustments on the rates are pushing up the mortgage payments by an additional $300 to $400. Even if they want to refinance, they may not have the option since the value in their property has decreased and credit conditions have become much more stringent. (The mortgage balance is higher than the value of the house.)
How can these borrowers manage? There are some federal programs under consideration that may help, but homeowners have to look into steps they can take.
The first thing to do is not to ignore the issue. If it seems like this month’s payment is not going to be made, be sure to call the lending institution and explain what’s going on. If there has been some changed circumstance, such as illness or job loss, the bank will work with the homeowner; it may be a different story if the borrower has been squandering his money.
Get in touch with a counselor. The Department of Housing and Urban Development can recommend a housing counselor in your area who will help you find ways to dig yourself out of the problem.
Cut back on non essential expenses, especially if you have credit card debt. You may not be able to cut down on energy and food expenses, but now may not be the time for the cell phone plan with a phone for each member of the family, or the premium high density television package from your cable provider. The savings can be devoted to your high interest credit card debt or to catch up on mortgage payments.
See if you qualify for a government aid program. The federal government has a new program for low income families that will let them roll over into a 30 year fixed rate home loan, as long as they were current on their loan before their ARM rate reset.
There are some more dramatic solutions, but if all else fails, you may not have a choice.
Sell the house. Selling the house in today’s market may mean a loss, but working with the lender may also mean that they will take the sales price in settlement of the ourstanding balance. It is often a better solution for the lender.
What about bankruptcy? This is a last ditch resolution since you will be hampered in terms of your long range financial plans. It will further damage your already poor credit, but if you have no other way out, it is a way to have debt consolidated, reduced and in some cases even cancelled, depending on your income.
The main lesson to learn is that you should take as many of these steps as possible to avoid foreclosure by working with your bank and officials.
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