The biggest mistake people make when they fall behind
You’re a proud homeowner. You scratched and saved every penny until you could afford to put a down payment on the house you wanted – the one in the right neighborhood, with maybe a little bit of room to grow into. Then, you did what everyone does. You went to a bank and applied for a mortgage for the rest of the purchase price. You listened carefully while the lender or broker explained the terms, you made sure that the monthly payment was going to fit into your budget, and after what seemed like forever, you sat down at a closing table. You signed a barrage of papers, and at the end, you were handed a key to your home.
You’ve become part of a community. You take care of your home and take pride in its appearance. Maybe you put in new floors or renovated the kitchen. Your kids are going to school. Your neighbors are nice. You’ve made your monthly mortgage payments dutifully. Everything is great.
Then, something happens that you didn’t plan for. Your basement floods. Someone you love gets sick. You lose your job. The bills don’t stop though, and now you’re behind. On the 18th of the month, your mortgage company leaves you a voicemail asking nicely about the mortgage payment you just missed. You’re embarrassed. You’ve never missed a payment before. Maybe you’re scared. One month later, you receive a letter from the mortgage company demanding that you pay what you owe now. The letter threatens foreclosure if you don’t pay. Things are not great anymore.
So, what do you do?
First, I’ll tell you what not to do. The worst thing you can do is ignore the problem and hope that it goes away. It won’t. Mortgage servicers have automated systems in place to call and send you letters. No one from the bank gets upset that you didn't pick up the phone. The computer automatically calls you again at a pre-determined time, and will continue to do so until you answer. The bottom line is that whether you speak to the bank or not, if you don’t get current on your loan within 120 days of your first missed payment, the mortgage servicer is sending your file to an attorney to start a foreclosure action. This is all automatic. I know this because I have mortgage servicers for clients.
Also, don’t go see a payday lender or other short term (and sometimes illegal) lender. That will be the fastest way for your problems to snowball.
Next, don’t panic. Help is out there if you take quick, decisive action. You have to do something before it’s too late, though.
Now, I’m going to tell you what to do. I promise you that this is something that you don’t want to hear. But it’s the truth, so you need to know this.
When you get that call on the 18th of the month after you miss your first mortgage payment, the first person you want to consult is a real estate broker. Yes, that’s right. A lawyer is telling you to go see a reputable real estate broker when you fall behind on your mortgage payments. See someone at a well-known agency, the ones whose “for sale” signs you see throughout your neighborhood. Some real estate brokers are vultures – don’t talk to one of those. If you’ve never heard of their agency, don’t talk to them.
So, why see a real estate broker? Because right at this moment, you need to know how much your house is worth. Figuring out how much your house is worth is important because you need to know whether you have equity in your home.
You need to know whether you have equity in your home or not, and you need to know now. Knowing whether you have equity in your property is going to determine how you need to proceed.
Next comes the part you really don’t want to hear. But it’s the truth, and you need to hear it.
If you have a good amount of equity in your property, you need to sell your house right now. That’s right. Swallow your pride and walk away. Take your equity, downsize, cut your expenses, and start again. That’s far easier said than done, but I’ve seen too many people lose hundreds of thousands of dollars in equity because they were too proud and too stubborn to cut bait when the situation called for it. Don’t let that be you.
There are some good stories about people who did the smart thing when they fell behind. I had a case against a guy who owned a brownstone in the Park Slope section of Brooklyn that was worth about $2.5 million. He lost his high-paying job and fell behind on his mortgage, owing about $800,000 on his mortgage. He contacted the bank to ask what he would have to do to get into a repayment plan, as he recently got a new job. There was a bit of back and forth, but since his income was based on sales commissions, it would be difficult to get into a modification because his income was unpredictable. So, he did the hard thing and put his house on the market. It sold immediately for $2.6 million, more than he thought it would. He took his approximately $1.6 million, moved to another place in the same neighborhood, and is doing just fine.
Unfortunately, there are more bad stories than good ones. I’ll tell you about one. An old woman owned a house worth about $350,000, and she had only about $50,000 left on her mortgage. The old woman passed away without a will, leaving her son as her sole heir. He inherited the house by operation of law, but there was no money left in his mother’s estate after paying for her funeral expenses. He couldn’t afford to pay his mother’s small mortgage after he paid his own bills, and didn’t check up on his inherited property often. He ignored the letters that came to his mother’s house and didn’t do anything when he got served with the foreclosure papers. Two years later, the amount owed under the mortgage ballooned to $125,000, and the property fell into disrepair. It eventually sold at auction for $160,000. The son received the surplus of $35,000. By sticking his head in the sand, he cost himself about $265,000.
Now, if you have only a small amount or no equity in your home, you will have different options to consider, but we’ll tackle that in another post. The moral of this story is that if you take quick, decisive action, falling behind on your mortgage will be a momentary setback instead of a devastating life event. The choice is up to you.
Jason Sackoor is a real estate attorney in Queens, New York concentrating on foreclosure and real estate litigation. You can check out his website, e-mail him, or call his office at (718) 767-3333 to set up a consultation.