Top 8 Mistakes Homeowners Facing Foreclosure Make

We’re not going to beat around the bush here with lengthy introductions or that sort of thing; we are going to jump right in:

1. Waiting Too Long to Take Action

The number one most detrimental and dangerous mistake homeowners facing foreclosure make is to wait too long to take action. There is no question about this: it is the most serious and most costly mistake and it is one that many homeowners make.

It’s understandable: they feel overwhelmed and unclear as to what they should be doing – and inadequate because they think that what they should be doing is paying the mortgage and since they can’t do that they panic and then freeze and do nothing.

Whatever happens, do your best to avoid this mistake.

Start talking to lenders, housing counselors, attorneys, CPA’s or whomever is in your personal circle of professional advisors BEFORE the Notice of Default arrives at your door.

Don’t wait. Be proactive as soon as you realize that trouble is coming.

2. Not Contacting the Lender Right Away

The next huge mistake that many homeowners make is to make the assumption that if they cannot pay the mortgage that there is no point in contacting the lender. This is a huge mistake!

First of all, there are all kinds of rules and laws in place to protect borrowers and to help them when trouble strikes: loss of jobs, death or serious illness of an immediate family member, or other critical life situations – these are things that do happen to people and do disrupt normal life.

Lenders and government agencies and laws recognize this and have special provisions to allow homeowners to get extensions, assistance, and in some cases “amnesty periods” wherein they do not have to make payments until the situation is resolved or improved and then the mortgage can be reinstated with the missed payments added on to the end of the mortgage. The worst thing a homeowner can do in the situation where they are in trouble for whatever reason, is to avoid talking with the lender.

3. Not Knowing Your Local and State Laws and Timeslines for Foreclosure

Another big mistake a great many homeowners make is failing to know the local rules as regard foreclosures in their state. Rules are different in every state and knowing the timelines and rules in your state is critical to your ability to find a workable solution because you need to know how much time you have and what the normal procedures and time frames are and how to get them extended if need be.

In California the process is as follows:

• 4) The Notice of Trustee sale is a 21 day notice: the public sale of the house will take place on the date specified in the Notice of Trustee Sale.

Generally, a lender is willing to work with homeowners in default during the first 90 days after the Notice of Default is filed, or the N.O.D. period. Once the Trustee Sale Notice is filed it is more difficult to gain cooperation from the lender; although not impossible. But

*Note: the new law passed in early 2009 in California extends the process by an additional 90 days when lenders to not receive waivers based on certain compliance criteria. We have posted the new law on the site here.

It is always best to start early, and keep contacting them consistently throughout the process to make sure they are aware of your efforts. If they know you are working with them to find an alternate solution they have the power and ability to delay these deadlines and they often will.

4. Not Knowing the Rules and Protections in Place to Help You

This mistake goes hand in hand with mistake number 3. Not knowing the rules that are there to protect you. For example, in California, there is a law which prevents lenders from coming after homeowners for a deficiency judgment or to collect additional funds to cover losses (beyond the recovery of the house through foreclosure). When the loan being foreclosed was a “Purchase Money Mortgage”.

That is: if the loan was taken out in order to purchase your home then it is a purchase money mortgage- not a refinance, and not an investment loan; but a loan used to buy your home. (Specifically, the loan funds went from the lender to escrow and then to the seller from whom you purchased the house).

Purchase money loans are known as “non recourse” loans by law in California. Each state has its own laws regarding the issue of recourse or collections on debts. In the case of a California non recourse loan, the lender has no recourse beyond the foreclosure to collect funds from the homeowner.

They may be able to take the house in foreclosure but they cannot come after you for the loss, or try to collect additional funds from you based on losses they incurred. Non recourse laws only apply to owner occupied homes, not investment property.

We have encountered many homeowners who were terrified that the bank was going to come after them for additional funds even after the foreclosure because the value of the property had fallen well below the loan amount. Many of these homeowners had purchase money mortgages and were in no danger whatsoever of any such additional consequences.

5. Failing to Actively Seek Out the Help You Need to Achieve Your Chosen Result

After these top four mistakes, the list gets a little more specific – because it ties to each person figuring out the best solution for their specific situation. In this area, we will start with homeowners who really want to keep their houses. Mistake number 4 is failing to seek out the help needed to get the desired result. For those wishing to keep their homes, the first step is often to consult with a HUD approved Housing counselor.

You can find the contact information for HUD approved housing counselors in Santa Cruz and Santa Clara counties here.

Trying to Work a Plan Without involving the Lender

Trying to work a plan without getting the lender involved is another mistake we see quite often. Remember: it is the lender who now has the power through the trustee’s deed to take your house.

You MUST deal with them- even if you think you have a plan that will work to get them caught up or to sell your property, they need to know what you are planning – and you need to realize that once the Notice of Default is filed there is a time line and it will proceed uninterrupted if you don’t keep the lender advised as to your plans – Coming up with a new buyer or an equity partner or even the back due balance on the outstanding debt will not help you if the Trustee Sale has already gone through.

7. Filing Bankruptcy Thinking it Can Stop a Foreclosure

This next mistake is one that, unfortunately, many homeowners fall into by assuming a few things that simply are not true. The mistake is to file bankruptcy either before or in the early stages of a foreclosure.

The reason many people do this is because they think it can “save the house”.

Bankruptcy can only postpone a foreclosure; it is a temporary stopgap measure that can prove to be a “poison cure worse than the ailment” if you get the idea. This mistake is the mistake of jumping into a bankruptcy in order to (they hope) stop the foreclosure.

It’s a complicated mistake for a few reasons: one is, that if you file bankruptcy before the foreclosure proceeding is completed and the bankruptcy is discharged before the foreclosure runs its course, you will lose the protection that bankruptcy can afford you against additional liens, or debt which the lender may want to make you liable for either through issuing a 1099, a deficiency judgment or sending uncollected and non remedied (read junior loans that did not foreclose) loan amounts to collections.

As we said, this can get complicated, but as a general rule:
In the event that you are already in bankruptcy when the foreclosure is still going on, make sure your bankruptcy attorney sets specific terms for protecting you from any further liability should the bankruptcy discharge before the foreclosure is completed.

If you think bankruptcy is your best option then be sure to discuss this idea not only with a bankruptcy attorney but with a credit counselor or HUD Housing counselor so you understand all the ramifications of filing bankruptcy.

And remember- while you may delay the foreclosure proceedings, a bankruptcy cannot stop the foreclosure in and of itself: do not think of the bankruptcy as a way to “keep the house” unless and until a knowledgeable attorney can explain to you exactly how that may be possible and under what conditions – in every case we know of, the bankruptcy only had the power to delay the foreclosure, not to stop it.

8. Trying to Sell the House Without Knowing True Current Market Conditions or Pricing

Should you determine that selling the house is your only way out, you need to know the real costs and sales price you should expect. This mistake can be very costly – especially if your loan is worth as much or more than the sale price you can reasonably expect to get for the house.

Trying to sell the hosue and “break even” may end up being more costly than you anticipate and you need to know what all the costs are going to be: closing costs, title insurance, taxes, agent fees, various inspections or warranties and other costs can add up quickly. If you determine that the best answer is to sell the house, then sit down with a reputable real estate agent or escrow officer and discuss what expenses you can expect to have to pay to complete the sale of the house.

Once you know what the expenses will be and what the current market price (or a rough idea of the current market value) of the house will be you can easily determine if the sale will cover all your costs or if it will actually cost you money out of pocket to sell the house.

Quite often we see homeowners rushing into sell the property without a clear understanding of the costs involved only to discover that the sale itself is going to end up costing them hundreds if not thousands of dollars they don’t have.

Be sure to go over all the details of what a sale will cost and how long it is expected to take – and remember that these two numbers may be related: the higher the price on the house, the longer it may take to sell, and the one thing you don’t have a lot of in this situation is time.

All too often we see homeowners determined that they can ‘get their price” and still come out ahead and beat the foreclosure clock – only to discover that they not only cannot ‘get their price” but they have now run out of the time they had to sell the house and get out without additional costs – but it’s too late and they lose the house to foreclosure because their market knowledge was not as strong as their insistence on not taking a perceived loss. A small loss or break even is far better than a total loss every time.

So these are the top mistakes to avoid if you are facing foreclosure. Be sure to read the < Top 5 Mistakes Real Estate Agents Make when Listing a Home for Short Sale. so that you are well armed if you are intending to sell your property with an agent while foreclosure is looming.

And remember: the more information you have the better off you will be. So don’t hesitate to ask questions of everyone involved in the process. Especially the lender, and any and all professionals who are offering you services. If you don’t understand something, don’t go forward until you do.

After all, you may be in a difficult situation, but you still have the power to act and to learn and to make the best choices possible for yourself.