Explain: By the end of this session, you will be able to determine how to manage financial difficulties and define foreclosure, determine where to go for help if facing foreclosure and identify possible alternatives to foreclosure.

Let’s begin by defining foreclosure.

Explain: When you obtain a mortgage to buy a house, the house itself becomes the security for the loan until you pay off the mortgage. This means that if you do not pay off the loan, the house (the security for the loan) belongs to the lender. It is not until you pay off the entire mortgage that you will retain full ownership of the house.

When making your monthly payment, each payment is applied first to the interest due, then to the principal. The principal is the face amount of the loan. For example, if you obtain a loan for $130,000 at 7 percent interest, the principal would be the $130,000. If you fail to make payments on the loan, the lender has a legal right to take possession of the property and resell it for the amount due on the note. This process is called foreclosure.

Explain: The hardest part of dealing with the possibility of foreclosure is the emotional stress for you and your family. Some people think that the problem will just go away if they ignore it long enough. The truth is that foreclosure is a very real situation.

Question: What suggestions would you have for someone who is not going to be able to make a mortgage payment?

Instructor's Note: Bulleted points will appear after discussion upon a second mouse click.

Explain: The best solution is to avoid the situation in the first place. However, some common issues such as illness, loss of employment or loss of a spouse can affect the ability of families to make their monthly mortgage payments. Other issues such as poor money management or signing mortgage loans with abusive terms or liens against the property can cause problems. Regardless of the situation, there may be options available.

Good money management, reacting quickly at the first sign of financial trouble and immediately working with your lender are some of the tools that can be used to avoid foreclosure. If you are facing a financial hardship, do what it takes, within reason, to protect your credit. If you have to sell your house before you become seriously delinquent on your mortgage loan, consider it. If you protect your credit, you can purchase another house and most importantly, you will be able to borrow and qualify for other loan products at reasonable interest rates.

Question: How many payments do lenders allow a homeowner to miss before considering them seriously delinquent?

Instructor’s Note: Bullets will appear after participant response upon a second mouse click.

Explain: Many lenders will consider a borrower to be seriously delinquent after two missed payments on a mortgage loan. At this time the lender may call the borrower to find out why the loan payment has not been made.

If ninety days pass without payment, the foreclosure process will begin.

Not all lenders use this same process. Some lenders may start foreclosure proceedings after the first missed payment.

Contact your lender as soon as you know you will miss a payment to find out what options you may have and what the consequences are for missing a payment.

Explain: Homeowners should contact the lender immediately when problems arise to establish good faith with the lender. If the lender tries to contact the homeowner and the homeowner refuses to answer, the lender will be less apt to assist the homeowner when the time comes to try to work something out.

Homeowners can contact their mortgage lenders by writing letters, contacting them electronically via e-mail or calling their offices. Regardless of the approach, the homeowner should be sure to contact the appropriate department. Not doing so can delay the homeowner’s ability to take advantage of possible options he or she may have.

It is important to understand that mortgage companies are not in business to own and sell houses. Foreclosing on a property can cost the mortgage lender time and money. Mortgage companies would rather work with you and help you catch up on your mortgage loan.

Question: When you contact your lender, what information might you need to have available?

Instructor’s Note: Create a list of information on the board. Bullets will appear after participant response upon a second mouse click.

Instructor’s Note: Highlight bullets on Slide #7.

Explain: You also should write down what was said during the call, including:

Instructor’s Note: Highlight bullets on Slide #8.

Explain: If something was agreed on, request it in writing so you have a record of it.

Explain: Many times homeowners fail to act immediately, and before they realize it, find themselves facing foreclosure. To avoid this situation, consult a financial professional or get more detailed advice from your mortgage lender.

One option is to find a local nonprofit housing organization. Housing organizations are known for helping first-time homebuyers attain homeownership. But, what many homeowners may not realize is that these agencies also may offer one-on-one counseling for post-purchase issues.

To find a certified housing counselor, call HUD at (800) 569-4287 or TDD (800) 877-8339 or search online at www.hud.gov/buying/index.cfm and click on the icon "Find a housing counselor near you."

Explain: There are some alternatives to foreclosure. Consider these options.

Special forbearance. The lender may arrange a repayment plan based on your financial situation and may provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you are able to meet the requirements of the new payment plan.

Mortgage modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This can help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.

Partial claim. Your lender may be able to work with you to obtain a one-time payment from the FHA insurance fund to make your mortgage current.

You may qualify if:

1. Your loan is at least four months, but not more than 12 months, delinquent.
2. You are able to begin making full mortgage payments.

Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan. For example, you may owe $80,000 on your house, but are willing to sell it for $70,000. With this option you are still responsible for the difference between the selling amount and the amount owed on the property, if any.

You may qualify if:

• The loan is at least two months delinquent;
• You are able to sell your house within three to five months; and
• A new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily give back your property to the lender. This will not save your house, but it is not as damaging to your credit rating as a foreclosure.

You can qualify if:

1. You are in default and do not qualify for any of the other options;
2. Your attempts to sell the house before foreclosure were unsuccessful; and
3. You do not have another FHA mortgage in default.

Explain: Foreclosure is the worst-case scenario for any homeowner. If a homeowner goes through a foreclosure, his or her credit is severely damaged and the options for financing another house are limited.

If a homeowner does have an opportunity to finance another house, the interest rate is likely to be very high.

Qualifying for any loan product that requires lenders to pull your credit report also is affected. This can include personal loans, auto financing, cellular phones and policies and rates with certain insurance companies. It is possible to recover from a foreclosure with time and patience. For information on credit, refer to the Managing Money module of the curriculum.

Lesson Summary:
Congratulations! You have completed “Foreclosure” in this Being A Responsible Home Owner series of classes.

Today we have defined foreclosure, determined where to go for help if facing foreclosure, and identified possible alternatives to foreclosure.

Question: Are there any questions?