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How Mortgages Work


What Is Foreclosure?

Missing mortgage payments could lead to the loss of your property. Foreclosure is the legal process by which a lender takes possession of your home and sells it in order to get its money back.

The U.S. has never seen a foreclosure crisis like the one that began in 2008. In that year alone, lenders filed 2 million foreclosure proceedings and 1 million mortgage borrowers lost their homes [source: Palmeri]. Experts from housing database RealtyTrac say that as many as 4 million households could receive foreclosure notices in 2010 [source: Glink]. Just because you receive a foreclosure notice, however, it doesn't mean you will necessarily lose your home.

The Federal government has instituted a number of refinancing and loan modification programs to help homeowners avoid the credit-crushing experience of foreclosure. At the website MakingHomeAffordable.gov, borrowers can see if they qualify for one of four key programs:

  • Home Affordable Refinancing -- This program makes it possible for homeowners whose properties are rapidly losing value to refinance their mortgage at a lower rate. This program is for borrowers who have remained current on mortgage payments until now.
  • Home Affordable Modification -- If your monthly mortgage payments surpass 31 percent of your monthly gross income and you've experienced significant hardship (loss of job, medical bills), the government can help negotiate an affordable new rate and payment plan with your lender.
  • Second Lien Modification Program -- Many Americans not only have first mortgages they can't afford, but second mortgages as well. Under this program, the government offers incentives to lenders to allow qualifying borrowers to have their second liens forgiven or interest rates lowered to 1 percent.
  • Home Affordable Foreclosure Alternatives -- If a borrower doesn't qualify for refinancing or loan modification, there is still a way to avoid the credit stain of foreclosure. The government will work with lenders to encourage a short sale (the home is sold for a loss, but at least the mortgage lender gets the proceeds) or something called a deed in lieu of foreclosure, in which the borrower voluntarily transfers the deed to the lender, but doesn't owe the remainder of the mortgage payments. In both cases, the government will supply the borrower with up to $3,000 to cover relocation expenses [source: MakingHomeAffordable.gov].

One important thing to remember is that foreclosures are lousy for lenders, too. According to the Mortgage Bankers Association, it costs lenders more than $50,000 per home just to process the claim [source: MBA]. Then the bank has to sell the home, which will likely go for a fraction of the original loan amount.

One last note on foreclosures: In today's mortgage climate, there is no reason to pay for mortgage counseling or loan modification services. In fact, the government warns that many of these services are scams. The Housing and Urban Development office runs the HOPE Hotline (888-995-HOPE), a toll-free number for any struggling homeowner who wants to avoid foreclosure.

If you'd like to stave off foreclosure by saving money on your mortgage, head over to the next page for pointers.


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