A: A foreclosure occurs when payments have not been made on a mortgaged property. The lender can legally redeem or take the property away from the owner. Lenders typically begin the foreclosure process after three months of defaulted payments. Homeowners receive a letter from their lender notifying them of the lender’s intentions.

A: Respond by calling your lender immediately. There may be a way to negotiate terms that allow you to navigate out of the foreclosure process and avoid a sheriff’s sale or auction of your home. By working with your lender on alternatives, you may be able to limit the damage to your credit.

To develop a realistic plan, you will need to gather up financial documentation, including recent income statements and monthly household expenditures. Your lender will need to review this information before recommending any options.

Although the foreclosure process may have started, the various steps involved typically take 18 months to complete. You and your lender do have time to develop a better solution, but it is imperative that you maintain contact and respond to all official correspondence.

A: It may take several conversations with your lender before settling on a course of action. To prepare for the dialogue, experts urge that you organize your financial documents including records that show your recent income.

Lenders also will want to see a list of household expenses. As you review your family’s budget, ask yourself whether there are discretionary expenditures such as health club memberships, cable TV or dining and entertainment expenses that can be cut. Lenders will not expect you to shortchange health care or insurance coverage and appreciate a record of steady savings.

A: Experts say it is important to remain in your home after being notified that the foreclosure process has commenced. There are several reasons for this.

First, you do have a legal right to remain in the dwelling until completion of a foreclosure sale or agreement that transfers the title to your lender or another buyer. By remaining in the home, you avoid the expense of renting another residence during the lengthy foreclosure process.

Once you leave the house, you forfeit your rights as a debtor in possession and your ability to reach a negotiated agreement with the bank diminishes. Your decision to vacate the home also may reduce your lender’s ability to achieve a reasonable sale price for the property. A larger deficiency payment may be required from you as a result.

A: A deficiency payment is required from the borrower when a home sold through the foreclosure process fails to recoup enough to cover the loan balance. A court will enter a deficiency judgment against the former homeowner at the conclusion of the foreclosure sale process.

A: A loan modification is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your mortgage to make the payments more affordable. Common loan modifications include:

• Adding missed payments to the existing loan balance.
• Making an adjustable-rate mortgage into a fixed-rate mortgage.
• Extending the number of years you have to repay.

A: In a short sale, the lender accepts a discounted payoff because proceeds from the sale of the home do not fully cover the value of an existing loan. Although the lender may be left with a loss, many are willing to work with borrowers and accept a discounted payoff on a mortgage.

From a lender’s perspective, short sales limit the time and costly paperwork associated with the foreclosure process. From the borrower’s perspective, although you will lose any equity in the home, the lender covers virtually all sales costs including commissions, escrow and title fees, and repair costs. Your loan is paid off, the damage to your credit rating may be less than that of a completed foreclosure and you are able to move on more quickly.

A: No, these are separate proceedings.

However, filing for bankruptcy may result in the discharge of debts that are preventing you from making your mortgage payments. A bankruptcy judge may reduce or eliminate debts related to medical expenses or credit card payments. Your responsibility for any deficiency payment also may be discharged through bankruptcy.

A better solution than bankruptcy may be to negotiate reduced payments to credit card companies or medical providers. A consumer debt counselor may be able to provide you with this assistance.

A: Homeowners and other consumers facing financial problems are vulnerable to scams offering what appear to be easy solutions. Beware of organizations that do not have a physical presence in your community or that offer to help you eliminate your debt for a fee. 

This website can educate homeowners about their rights and identify reputable organizations that can offer help at little or no cost. The lenders, legal advisers, credit counselors and real estate experts found on the Survival Kit Resources Page on this site have been reviewed and/or certified by trusted agencies and organizations, including the U.S. Department of Housing and Urban Development, the Wisconsin Housing and Economic Development Authority and the Wisconsin REALTORS® Association.

A: When faced with foreclosure, a homeowner may want help in understanding the foreclosure process and various options. While some property owners may contact real estate agents or foreclosure attorneys for assistance, others may be attracted to mortgage foreclosure consultants. Unfortunately, many so-called foreclosure consultants are nothing but scam artists looking for easy profits. These scam artists have made it difficult for homeowners to distinguish them from legitimate foreclosure consultants or loss mitigation specialists.

Basically, a mortgage foreclosure consultant is any person who offers to help homeowners resolve foreclosure problems by stopping or postponing the foreclosure sale, obtaining a forbearance of mortgage obligations, helping the owner obtain a loan or an advance of funds, avoiding any impairment of the owner’s credit resulting from the foreclosure, or saving the home from foreclosure.

Legitimate foreclosure consultants can be found by contacting government agencies and nonprofit organizations. The article, “Best of the Legal Hotline: Finding Help for Homeowners,” in the May 2009 edition of Wisconsin Real Estate Magazine provides helpful resources. View the article online at wra.org/WREM/May09/HelpHomeowners. A wide range of services are available over the phone, in person and online, and the cost of services differs from one option to the next. There are many options at no cost.

A: The Mortgage Forgiveness Debt Relief Act of 2007 allows borrowers to exclude debt forgiven in the sale of a principal residence from taxable income.