With risky home loans come risks of foreclosure

The current real estate market is a strange one and prices continue to soar amid speculation that a housing bubble is about to burst. Prices in many markets have reached previously unthinkable levels, and people just keep buying. Many, if not most, buyers no longer have the ability to purchase homes with traditional 30 year, fixed-rate loans. Buyers are now concentrating on the more unusual loan types - the Option ARM, the interest-only mortgage, and unusual “piggyback” loan arrangements. These risky home loans are, for many buyers, the only way to purchase a house on a given amount of income.

The problem with this is that as interest rates rise or housing prices fall, many of these buyers will find themselves unable to make their mortgage payments. With an Option ARM, for instance, the house payment could double with little warning. If a buyer is unprepared for this shock or is not in a position to refinance, foreclosure could result.

Since no one wants to have their house taken from them, here are a few more tips on avoiding foreclosure:

• First step - Call your lender. You’d be surprised how many buyers fail to call their lender when they can’t make their house payment. If you call and tell them that you are having financial trouble, they will probably offer to help in some way. If you do not call, their assumption is that all is normal, and they will expect full, prompt payment each month.  Lenders don’t want to foreclose; it costs a fortune and they end up with a house they don’t want or need. They’d much rather work with you to overcome a temporary financial setback than have to march in and take your house. Call them, be honest, and they can probably work out a temporary payment arrangement that works for both of you. This may involve restructuring the loan altogether, suspending a few payments, or lowering the payments for a set amount of time.
• Your lender may allow you to sell the home, even if doing so would realize less money than the balance owed on the mortgage. Your FICO credit score would take a hit, due to the loss, but the harm to your credit score would be much less than if you simply walked away from the loan.
• In truly desperate situations, your lender may be willing to take the deed back. You would, in effect, give them the house and walk away. They would have to sell it and would probably take a loss after expenses, but this would affect your credit score less than simply defaulting on your mortgage.
• If you have an FHA loan, contact the department of Housing and Urban Development (HUD.) They have a plan where they can lend you money once to overcome a temporary setback. This can be paid back when the house is sold or when the mortgage is paid off.

None of these are ideal solutions, but all of them are better than simply walking away. Doing that could make it difficult, if not impossible, to obtain a mortgage in the future. The first step is the most important. If you get in financial trouble and cannot make your payment, call your lender right away.