I Need to Refinance to Stop Foreclosure

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The scenario: “I have fallen behind on my mortgage payments, and I’m now facing foreclosure as a result. I started with an ARM loan and low interest, but the rate increased. My home values have also dropped. I need to refinance to stop foreclosure from happening. How can I do this?”

This kind of scenario has happened to millions of Americans over the last couple of years. The exact details may vary, but the end result is always the same. People find themselves in a situation where they need to refinance to avoid being foreclosed upon. But how is this possible? Or is it? What can a homeowner attempt this kind of financial sidestep?

The first thing you need to realize is that the odds are stacked against you. I’m not being a pessimist here — just a realist. I’ve seen a lot of websites and news reporters sugar-coating this subject, and saying how the new government programs are helping people refinance to stop foreclosure from happening. But it’s not as common as they would have you believe. Most people get turned away by lenders, and for a very specific reason: They are simply too far underwater. In other words, they have too much negative equity to refinance. The value of the home has dropped to a point that they owe more (and often much more) than the home is worth.

It’s frustrating, and it feels like a trap. But that’s the reality of the situation. Right now, many people are simply stuck with their mortgages. They need to refinance to stop foreclosure, but it’s just not within reach. Meanwhile, they are watching their payments rise as their ARM loans reset. And many of them have lost jobs resulting from the recession. These will be the most common reasons for foreclosure in 2010 and beyond.

Refinancing to Stop Foreclosure – The Good News

Now for the good news. In certain situations, it may be possible to refinance your mortgage to avoid foreclosure entirely. These scenarios are the exception to the rule, but they do occur.

So, how do you start down this path? What are the step a person can take to stop foreclosure by refinancing? Here are the steps I recommend to find out where you stand, and what your options are:

1. Recognize the Scam Artists

First, you need to realize that sharks and scam artists are swimming in these waters — and a lot of them. When researching this article, I did a Google search for the title phrase: “I need to refinance to stop foreclosure on my home.” Most of the websites / services I encountered made big promises and asked for up-front fees. These are two common traits of a foreclosure-prevention scams. This little exercise revealed something I already suspected. There are more bogus websites than legitimate ones. (Related article: The Truth About Foreclosure Help)

Many of these websites have web addresses and color schemes to make you think they’re part of the government. But they’re not. A web address has to end with “.gov” to be a government site. These people just want to charge you fees and leave you right where you started from — facing foreclosure.

The Fannie Mae website has some good tips for recognizing and avoiding these scams. Here’s the link.

2. Get Your Home’s Current Value

The amount of equity you have in your home is going to determine whether or not you can refinance to stop foreclosure, more than any other single factor. If you have positive equity, meaning you current mortgage balance is less than your home’s value, you’ll have a much easier time refinancing. If you have slightly negative equity, meaning you owe a little more than what your home is worth, you might be able to refinance through the Making Home Affordable program. But if you have seriously negative equity, meaning you are upside down / underwater in the loan by 25% or more, you may not be able to refinance.

If you want to get an idea of how much equity you have (and I recommend you do), you need to compare your home’s current value to the amount you still owe on your mortgage loan. You can get a professional appraisal for around $250, and you can get your current mortgage balance from your lender. If you apply for a refi loan, the lender will eventually send their own preferred appraiser to value the property, but I recommend doing it on your own as well. Based on your findings, you will at least know where you stand in terms of equity, home value, etc. Many people who need to refinance to stop foreclosure do not even know where they stand, and that’s where much of the frustration comes from. So measure your equity.

3. Talk to a Housing Counselor

I also recommend speaking to a HUD-approved housing counselor. In most cases, these counseling services are free. A counselor can help you understand your options for foreclosure avoidance, and they might be able to expedite your paperwork as well (if you qualify for the Making Home Affordable program). When you speak to somebody, tell them you are trying to refinance to avoid foreclosure on your house. If refinancing is not possible, for the reasons we discussed earlier, the counselor will explain the other options available to you. Education is the first step to success.

4. Find Out Who Owns Your Mortgage

When you take out a mortgage loan for a house, there’s a good chance the loan will be sold into the secondary mortgage market. This is often done through Freddie Mac and Fannie Mae. If your mortgage is owned or backed by one of these organizations, you’ll have more options for refinancing. You’ll also be more likely to qualify for Making Home Affordable, the government-supported refinance program. You can find out if Fannie or Freddie owns your mortgage through the page below. This is also your next step in the research process, by the way.

Go here next: http://makinghomeaffordable.gov/refinance_eligibility.html

“I need to refinance my mortgage to stop the foreclosure process.” This is one of the most common laments among homeowners today. For many people, refinancing is just not an option. They have lost too much equity, their credit is too poor, or a combination of these factors. It’s a harsh reality, but a reality nonetheless. On the other hand, thousands of Americans were successful in refinancing to avoid foreclosure, even with slightly negative equity. So here’s what you should take away from this. Explore your options and find out where you stand. But be realistic. Plan for the worst but hope for the best.