Gather Records and Identify Deadlines
Open mail as soon as it arrives
Open your mail and read it as soon as it arrives. If you ignore letters or court papers, you may lose your home without even having a chance to defend yourself. Be especially careful to look at papers that are hand-delivered or that require a signature from you. These papers usually have short deadlines and require you to do something quickly. Papers that come from your lender, your lender’s attorney, or the court are especially important.
Identify any deadlines
Check for deadlines on any written papers such as letters from the lender or the lender’s attorney or on any court papers. Mark these down on a calendar. Remember that a homeowner who acts within the deadlines is in a better position than one who is late to respond. Use the information in Foreclosure Timeline (The Foreclosure Process) to determine where you are in the foreclosure process and what you need to do as your next step.
Beware of scams (offers that sound too good to be true)
When you are in foreclosure, you may receive a lot of junk mail. This happens because court records are public and companies use lists of foreclosure filings to mail information about their services to people in foreclosure. Some companies may even visit your home to sell you their services. Beware of the offers from these companies. An offer to help you save your home from foreclosure that sounds too good to be true probably is too good to be true. Below are two common scams:
Convincing you to transfer the deed to your property to someone else. A common scam (trick) is where you are told to transfer the deed to your property to someone else temporarily and then buy your house back in a year or two when your credit improves. It is very unlikely that you will ever get back the deed to your property. It is very likely that the new owner will try to evict you so the new owner can sell the house for a profit. Don’t do this!
Paying a fee to have your mortgage renegotiated. Another common scam is where you are told that for a fee, a company will renegotiate your mortgage with your lender. You do not have to pay a fee for this type of service. A housing counselor can do this for you for free.
Get a copy of your mortgage documents
At a mortgage closing, a homeowner signs many documents in order to get a mortgage loan. The mortgage closing may take place in an office or it may even take place in your house or a public place. The documents you signed at the closing are very important. You must try to understand the mortgage documents in order to prepare a defense to foreclosure. You should have been given a copy of the documents at the closing. If not, or if you can’t find those documents, you can get a copy by writing a letter to your mortgage servicer.
Send a Request for Information
If you can’t find your mortgage documents, you are entitled to receive a copy of them from the mortgage servicer (the company collecting the payments from you) by writing a letter called a Request for Information (RFI). See Foreclosure Forms for a sample RFI and instructions.
Other documents related to the mortgage
It is helpful to also have the following documents handy, especially if you disagree with the amount of money the lender claims that you owe.
Your mortgage statements
Proof of payment such as cancelled checks, money order stubs, and credit card statements
Proof of homeowner’s insurance
Proof of property tax payments
Evaluate Your Finances
Find out how much your house is worth
You can find out how much your property is worth by contacting a realtor and asking him or her to prepare a comparative market analysis. Many realtors will do this at no charge. This will help you determine if you have any equity in your property. (Equity is the amount of money that would be left over if you subtract the amount of any liens—mortgages or loans—from the market value of your property.) Determining the market value of your home will help you make decisions about what to do, such as whether it is time to sell the property or whether a bankruptcy can help you save your home. For more information about bankruptcy see Other Ways to Protect Your Home From Foreclosure.
Prepare a budget
To understand how much you can afford to pay for housing, prepare a budget showing your actual income and expenses for the past few months. A general rule of thumb is that your housing expenses (which include principal, interest, taxes, and insurance) should not be more than 38% of your gross (before tax) income. Your housing payment can be higher, but you need to have enough income to meet all of your other expenses, such as utilities, food, and transportation. This information is important so that you can make realistic decisions about what to do next.
A housing counselor is someone who can help you prepare a budget.
Be aware that lenders may use formulas different from this one to determine an affordable housing payment, and that lenders will also be interested in your other debts when they evaluate how much you can afford to pay.
Save your money
If your lender will not accept your mortgage payments, it is very important that you save all of the money that you would have spent on your monthly housing payment each month. If you cannot save this amount, put aside as much as you can afford. If possible, try to save at least 38% of your gross monthly income each month or enough to cover the taxes and homeowner’s insurance, whichever is more. You may need this money to settle the foreclosure lawsuit with the lender or, in the worst case, use it to relocate (move into other housing).
Write Out Your Story
Writing out the story of what happened to you will help you, a housing counselor, an attorney and, eventually, a judge to understand your defenses. Many defenses to foreclosure involve looking back at the events that happened at the time the loan (or a series of loans) was made. In your story, try to explain how you got from a place where you could afford your property to a place where you cannot. Try to answer all of these questions:
Did I buy or inherit the property?
When did I buy or inherit the property?
How many times have I refinanced the property?
Why did I refinance each time?
What happened to any cash I took out?
How much was I earning at the time I got the loan?
Was the loan affordable at that time?
Did I have to borrow extra money just to make the mortgage payments
How did I come into contact with the mortgage broker or lender?
What was I promised at the time I got the loan?
What did I actually receive?
When did I begin to have trouble making mortgage payments?
Why did I begin to have trouble making mortgage payments?
Review and Understand Your Mortgage
At the mortgage closing, you signed many documents. Look for these documents that will help you understand your mortgage and prepare a defense:
The mortgage note
Any riders to the note
The Truth in Lending disclosure statement
The itemization of amount financed (if any)
All copies of the notice of right to cancel (if any)
What is a mortgage?
A mortgage is an agreement that a lender may use a house as collateral for a debt. Using the property as collateral means that, if the homeowner does not pay the debt, the lender can bring a foreclosure case in court so that the property can be sold to satisfy the debt.
After a homeowner signs a mortgage, the original mortgage is recorded with the County Clerk in the county where the house is located. You should be given a copy of the mortgage at the time you sign it. After the mortgage is recorded, you should receive a second copy in the mail, stamped with the recording information.
What is a note?
When you sign your mortgage, you also sign a document called a note. The mortgage note is like an IOU. The note spells out the amount of money you borrowed and the terms for repayment, such as the interest rate and length of the loan. A loan default occurs when a borrower fails to do what the mortgage note requires. For example, a homeowner who misses a mortgage payment is in default.
It is important to identify and understand at least the following information from your mortgage note:
What is principal? The principal is the total loan amount borrowed. In other words, it is the face value of the note.
What is the interest rate? The interest rate is the amount that a borrower pays the lender for the use of the money, expressed as a percentage. There are two types of interest rates:
Fixed interest rate: A fixed interest rate is one that stays the same throughout the entire life of the loan.
Adjustable rate mortgage: An adjustable rate mortgage (also known as an ARM) is one where the interest rate changes periodically. The note will tell you how often the interest rate can change and the maximum rate that you can be charged. Many loans have a short time period during which the interest rate is fixed, such as two years. After that time period is over, the interest rate becomes adjustable for the rest of the loan term.
What is the loan term? The loan term is the length of the loan. Most loans last for 30 years. A loan that lasts for 15 years will have higher monthly payments, but you will pay less interest over the life of the loan. A loan that lasts 40 years will have lower monthly payments but because you are paying for a longer time, you will pay a lot more interest over the life of the loan.
What are exotic loan products? Some loans have more complicated features. These loans are sometimes called exotic loan products. If you received an exotic loan product, ask yourself whether it was unfair, not a good match for your needs, overly harsh, inevitably designed to lead to foreclosure, or not what you bargained for. If so, you may have been a victim of predatory lending. In your Answer to the Foreclosure Complaint, you should include specific information about the terms of the loan and why they are inappropriate for you. Below are some examples of unfair, harsh loans that are probably not what you bargained for:
A loan with a low interest rate that lasts for a short period of time (as little as one month or as much as a few years). This type of loan is referred to as a teaser rate loan. The note will not use the term “teaser rate” The only way to determine if you have a teaser rate is to look for the first interest rate change date in the note.
A loan where your monthly payments do not pay down any of the loan principal. This type of loan is referred to as an interest-only loan. With an interest-only loan, even if you make your mortgage payments on time each month, at the end of the loan term you will still owe the entire amount of the loan principal that you borrowed at the beginning of the loan. If you cannot pay the entire loan balance at that time, you would have to refinance the entire loan balance or sell the home at the end of the loan.
A loan set up so that the monthly payments do not cover the full amount of principal and interest that would be necessary to fully pay off the loan within the loan term. This type of loan is referred to as a negative amortization loan. (Amortization is a reduction in the loan principal that happens when regular loan payments fully cover both principal and interest.) When a loan negatively amortizes, your monthly payments do not reduce the total amount you owe on the loan. Instead, the principal of the loan actually gets bigger each month, so that you will owe more than you originally borrowed.
A loan where the monthly payments do not fully pay off the loan. If you have a loan referred to as a balloon loan and you make all monthly payments on time, you will still owe some portion of the loan at the end of the loan term. At that point, if you don’t have the funds to pay off the remaining loan balance, the loan would have to be refinanced or the house must be sold.
A loan that appears to give you the choice of three or four different monthly payments. This type of loan is referred to as a payment option ARM. A payment option ARM is a loan that appears to give the borrower a choice of three or four different monthly payments. The note sometimes identifies a loan as a payment option ARM, but sometimes it does not use that expression. In a payment option ARM, the homeowner has the choice of paying a monthly payment that will fully amortize the loan over the loan term, an interest-only payment, and a minimum payment. The minimum payment does not pay down any principal and only pays part of the interest that accrues for the month. The rest of the interest negatively amortizes and is added to the principal of the loan. The lowest payment option is usually based on a very low teaser rate, such as 1.9%, which does not last. The interest rate increases—usually within a few months of closing. When the loan has negatively amortized such that the borrower now owes a certain percentage of the loan, the borrower will lose the option to make any payment other than a payment that will fully amortize the loan. That percentage is identified in the note, and is usually around 115% to 125% of the original loan amount. These loans are especially dangerous when made to a homeowner who cannot afford anything other than the minimum payment.
No income, no asset verification loans and stated income loans. At the time you applied for the mortgage, you may have been told that the loan was a no income, no asset verification (NINA) loan, meaning that the lender may not even have asked you for your income, or a stated income, stated asset (SISA) loan, meaning that the lender asked you how much you earn, but did not check with your employer. If the loan was based on a much higher income than you actually had, that may be a reason why the mortgage is unaffordable. That might be an important part of why you could not afford the mortgage payments, and how you ended up in foreclosure. Your loan documents may or may not contain this information.