How to Avoid Mortgage Default

Take these steps to deal early and openly with loan troubles.
By: Jim Wasserman

Loan trouble may start with one missed mortgage payment, but it can spiral out of control. As bills stack up, how do you cope? Do you stop eating out and drop cable TV? Do you put off car payments to make the house payment? Do you max out credit cards and exhaust the savings account? Before you know it, you’re facing bankruptcy and foreclosure.

How you deal with impending loan trouble goes a long way to ending it in the best way possible. Let your lender know about your situation early. Banks prefer working with you as opposed to taking back the house, which almost always represents a loss for the lender.

If you’re facing mortgage trouble, take these steps:

  • Get moving on a solution, or get help before it's too late. Many people burrow their head in the sand and wait until they've missed two or three payments to start working out a plan.
  • Write a hardship letter to your lender, putting your situation in writing. Be specific about what caused the delinquency, with dates and a time frame. Make it detailed, but be concise.
  • Be polite and work with the lender to find a solution you both agree on. This may be extending the repayment period, suspending the need for payments for a few months, borrowing from family members or tacking the missed payments onto the back end of the loan.
  • Don't give up and walk away from your house before trying to find some kind of solution. And don't assume a short sale -- a process by which the bank agrees to sell your home for less than you owe -- is your only way out.
  • Don’t expect to be automatically approved for a short sale, which usually requires involuntary hardship, such as a lost job, bankruptcy, divorce, death, medical crisis, relocation or some other legitimate difficulty. In these cases, banks typically ask for two years of tax returns, pay stubs and bank statements, the divorce decree, the bankruptcy filing, or letters from doctors.
  • Foreclosure is a last resort. It stays on a credit record for seven years, and it may be four years before a buyer can use regular interest rates again. Missing up to three mortgage payments also stays on a record for seven years.

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