If you are facing repossession, realistically assess whether you are able to keep your home. When you have missed some mortgage payments, or you think you will soon, it’s time to face what’s probably the tough question: can you afford to keep your house?
Apart from the emotional considerations that surface when a repossession is threatened, there are economic issues that have to be considered. You need to consider your financial situation which has probably changed since you bought your house.
Look at whether you have any equity in your home. The equity will be the difference between what you owe on the house and what you can sell it for. Some homeowners have negative equity which means that selling your home would get you less money than what you owe on your mortgage and other loans secured on the house.
Estate agents valuations are usually based on the amounts that similar houses in the neighbourhood have recently been sold. As property values fluctuate, it becomes difficult to accurately determine the value of a property, especially if no houses in a neighbourhood are selling. The only real way to find out your house’s market value is put it up for sale and see what happens.
If you have some equity in your house, it’s probably worth it to try to hang on to your house, if you think you can afford future monthly mortgage. If you can’t afford the payments, see if you can reduce your debt load so that you can priority to them.
If you negative equity and you are behind on your mortgage payments, there’s not much point in trying to keep the house. It probably makes sense to give up your house if its current value is 25% less than what you paid for it. That’s because your house’s value would have to appreciate by as much as it dropped for you to come out even, and that will likely take several years.
However, if you have negative equity in your home and still want to keep it, you might be able to reduce your mortgage payments by working something out with your lender or taking advantage of a favourable refinanced loan if available.
If you have negative or little equity in your home, take stock of the property market in your area before making your decision to keep or walk away from your home. If the market is slumped, and appears to stay that way for some time, your best option may be to let your home go. If the property market appears to be buoyant (meaning prices may rise quickly), it might make sense to try to keep your home even if you have negative equity. Even if the market has collapsed, judging by history, home prices will ultimately rise again. As Mark Twain is reputed to have advised, ‘Buy land! God isn’t making any more of it’. Of course, knowing when prices will rise is the key question.
Remember, there is no guarantee that your house will ever recover its original value. You don’t want to throw good money after bad. If the housing market doesn’t rebound quickly, every sacrifice you make now to keep your house could be for nothing if you ultimately lose it.
It is therefore important to understand the steps you can take, if you are facing repossession. Quick action is essential if you are to succeed, and you must never simply give up and think that nothing can be done. Apart from losing your home, you will seriously damage your credit rating, making it extremely difficult to get credit to purchase another home in the future.
There are a number of things which can be done. However, a word of warning. Beware of scammers. There are a number of scam merchants out there, who will offer to save your home from repossession. Whether or not they can do so it will be a very expensive and probably only short term answer. Don’t come to any agreement with them and don’t sign anything before taking proper professional advice. Your local Citizens Advice Bureau will be able to provide that without charge.
Top of the list of what you can do is negotiation with your mortgage lender.
As soon as you realize you’ll have trouble paying your mortgage – ideally, before you’ve missed any payments – contact your lender. Now, more than ever, lenders are willing to negotiate with home loan borrowers, if only to reduce the number of repossessions they’re dealing with. (Some lenders are even taking the initiative and contacting at-risk borrowers themselves.)
Do it sooner rather than later. If you call soon, you may be able to work out a solution with your lender. But if you’ve already missed three or four payments, it may be too late, and the lender may insist on repossession.
The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to redo the terms of your loan.
What to say when you contact your lender. Here’s what you should ask for:
- Forbearance. You make a reduced payment, or no payment, for an agreed-upon period of time. Usually, the lender requires you to make up the difference at a later time. The lender is most likely to agree to this if you can demonstrate that you will soon receive a bonus, tax refund, or some other extra cash;
- Loan reinstatement. You agree to make up your missed (or reduced) payments by a specific date;
- Loan modification. Your lender agrees to alter the terms of the loan so that you can better afford the payments. For example, the lender may agree to add your missed payments to your loan balance, to stretch out your loan over a longer term (which will lower your payments but result in more interest over the life of the loan), or to convert an adjustable rate to a fixed rate mortgage.
Filing for bankruptcy may help you keep your home, or at least get you out from under your mortgage. When you file, the repossession process is legally stopped. You will gain time.
If your home has appreciated in value since you bought it, you may be able to sell it yourself. Again, contact your lender, who may let you stop making payments until the house is sold.
Ideally, the proceeds from the sale will cover your mortgage and selling costs. But if they won’t, ask your lender to consider what’s called a ‘short sale’. That means the lender accepts the sale proceeds even if they’re less than the amount you owe.
It may be possible to reduce the payments on home loans without risking repossession. If, like many people, you have a number of loans secured on your home, it may be possible to stop or reduce payment on some of them. This must, however, be a last resort and will only allow a temporary breathing space for you to either get your financial situation in order or sell your home.
This is how it works:
The original loan you took out to buy your home is called a ‘first mortgage’ or sometimes first charge. The reason it is called first is because it gets paid first after a sale. It will have priority over any other mortgage or charge on your property. In the same way a second loan is paid second and after the first mortgage has been paid off. Third and any other loans are paid off in the same way according to their priority.
If a mortgage or loan secured on property is not paid, the main remedy for the mortgage lender is to apply to the court for repossession and a court order that the property be sold. The lenders will then be repaid in order of priority from the sale proceeds once the costs of the sale (estate agents and solicitors fees) have been taken out. With falling property prices there will sometimes not the enough left after paying the costs of sale and the first mortgage for anything to be left to pay off money owed to second and subsequent lenders. If this can be shown to be the case, there is little point in the second and third lenders forcing a sale of your property. It would be far better for them to wait in the hope that your financial situation will improve and you be able to start payments again. Thus, it may well be possible for you to negotiate a payment holiday or reduced payments on second and subsequent mortgages.
Until the last several years, banks would not make loans without good credit and a healthy chunk of equity to secure the loan. In the recent bubble years, however, banks were more willing to extend loans to homeowners without a measurable chunk of equity. Banks did this with the expectation that property values would rise fast enough to provide adequate security for the prospective loan. Also, liberal home appraisals were easy to come by, creating equity on paper that might not have actually been there.
The real risk of possession actions is from the first lender and you must always keep up payments on your main and first mortgage.
Stopping payment on any loan, even if not secured on your home, has to be a last resort. County court judgements and defaults all affect your credit rating and will do so for a number of years. However, if by stopping payments on second and third loans you can pay the first, this will be a strategy well worth considering.