Homeowners facing foreclosure should not wait to take action to prevent their foreclosure. Taking action right away can prevent foreclosure, protect your credit, and save lots of money and trouble now and in the future. Different states in the US have different time periods relating to foreclosure. Some are "short states", which means that a family only has 21 days from the time of their foreclosure notice to when the house is sold at auction. Others are longer states, where a family has 4-6 months. Arizona, where my business operates, is a 90-day state, meaning that once a Notice of Trustee Sale is recorded, the family only has 90 days to resolve the situation before the house is sold at the trustee sale (auction). Often, especially in longer states, homeowners facing foreclosure feel like they have lots of time, so they wait and do not take action to prevent their foreclosure from happening and to keep their credit standing from being trashed. If nothing is done until a day or two before the auction, it is usually impossible to persuade the lender to postpone the foreclosure sale at that point. There's just not enough time to put together the research and paperwork to send to the lender to convince them to hold off. However, there is great benefit to taking action right away to prevent the foreclosure:
1) Once a Notice of Trustee Sale is recorded, that means that usually the borrower is already 3 months behind on the mortgage. Waiting another 3 months to do something, even if the foreclosure is prevented at the last moment, still has a VERY NEGATIVE effect on the borrower's credit report.
If one were to wait this whole 6 months without making any mortgage payments, there would most likely be the following mortgage lates on the credit report by the end of the foreclosure process:
30 days late 6 times
60 days late 5 times
90 days late 4 times
120 days late 3 times
150 days late 2 times
180 days late 1 time
Then, of course, after all these lates, there would be the big one: FORECLOSURE. Hopefully it is clear that time is not your friend and waiting like this can ruin your credit report quickly. It can take as much as 7 years for all this to disappear from a credit report, and during that time it will be either impossible to qualify for a new mortgage, or if you do, it will be much more expensive due to the much lower credit score.
2) The damage to one's credit rating can make certain options impossible, such as refinancing. If there's not a lot of equity in the home, a lender typically is not loaning money based on the security in the property itself, but more on the creditworthiness of the borrower. With trashed credit, this option becomes impossible, or at least extremely expensive. With poor credit and a pending foreclosure, if a lender does offer a refinance loan, the interest rates will be very high and the costs to get into the loan (e.g., points paid up front) will be very expensive. The resulting payment would also likely be much higher than the old one. How do the banks think the homeowner can afford the new payment when they couldn't afford the old one? This option is often impossible for most people facing foreclosure, especially those who wait too long to take action, and who have little equity in the property to begin with.
3) The impact of trashing your credit report can be felt in other areas of your financial life. For example, if you have credit cards with balances, if you read the fine print you'll find that many of these lenders can increase your interest rates based on your payment history to other creditors. In other words, they periodically check your credit to see how you're doing with your other accounts. Once your credit report has all these lates on it, the credit card companies see you as a much higher risk, so they'll raise your interest rates and therefore your minimum payments will go up drastically.
4) In most real estate markets, waiting too long to take action means c
ertain options are off the table - impossible to do. For example, many people in "hot" real estate markets where properties sell fast (like Arizona used to be - now we're a more normal market again and it's taking longer to sell) believe they can list their property with a realtor, sell it quickly, pay off the mortgage and move on. What many people fail to realize is that it may take three months or more to find a buyer and get a contract on the property. Then, the contract usually calls for a closing in 30-45 days, so there's another month or two. If the homeowner facing foreclosure waited until the Notice of Trustee Sale was recorded or longer to start this process, the house will be sold at foreclosure auction long before this sale can be closed. Plus, if the house is over-leveraged (not much equity), there is no flexibility to lower the price to get a quick sale, since the proceeds would not be enough to cover paying off the loan, interest, penalties, late fees, closing costs, and realtor commissions. Such a homeowner would wind up having their house sold at auction and their credit trashed for many years.
5) Waiting only increases the costs later. Many people don't realize that for every month that goes by once mortgage payments are being missed, interest and fees are piling up and compounding. Also, once the foreclosure process starts, there will be legal fees and other penalties the lender will charge. Many people who plan to borrow money from family or friends to reinstate their mortgage loan think they only need the two or three or four month’s worth of missed payments. They fail to get a reinstatement letter from the bank showing all of these extra charges that have to be paid to bring the loan current. When they do find out, the family members and friends are surprised and sometimes unable to help when they learn that the amount needed is twice what they thought. Many lenders refuse to accept partial payments - if the amount sent in is not the full reinstatement amount, they'll actually send the check back and proceed to foreclosure auction. This situation gets worse every month that someone waits and does not take action.
I know this sounds bleak, but there is good news - the problem can be solved, the foreclosure prevented, and the credit damage minimized - IF ACTION IS TAKEN RIGHT AWAY! Acting sooner rather than later keeps more options open, minimizes costs, protects your credit, and shows future creditors that you took positive action to create a brighter future for yourself and your family. Don't wait - as you can see, the consequences can be terrible.