How to Avoid Foreclosure & What to do When It’s Too Late

Foreclosure is one of the scariest financial challenges a homeowner can face. Losing your home means not just finding somewhere new to live, but also dealing with years of damaged credit.

But foreclosure isn’t always inevitable. If you act quickly, you may be able to keep your home, protect your credit and get back on track financially. Even if it’s too late to stop the process, you still have options that can soften the blow.

The most important step: don’t ignore the problem. Lenders would much rather work with you than take your home. The sooner you act, the more choices you’ll have.

What Is a Foreclosure?

Most people buy homes with a mortgage. When you sign your loan agreement, you agree that the home itself is collateral for the loan. That means if you stop making payments, the lender has the right to take back the home through a legal process called foreclosure.

The lender then sells the property to recover as much of the debt as possible. Foreclosure forces you out of the home and leaves a serious mark on your credit report, where it can stay for up to seven years.

How to Avoid Foreclosure

You’ve probably heard the advice that you should try to have six months of basic expenses saved up for emergencies. Those savings could allow you to keep paying your mortgage if you lose your job or face a crisis.

If you don’t have that cushion, don’t panic. Other solutions may help, but just know that the options for defending yourself from foreclosure are better if you haven’t yet missed any payments.

Loan Refinancing

One possibility for those who have kept their payments current is refinancing the loan. If you can get a lower interest rate, refinancing should lower your monthly payments. There are costs involved, including fees, so you have to factor those in to see if this is right for you.

You should try to stay ahead of the storm. Your chances for a favorable refinance – the best option to avoid facing foreclosure – are better if you are still current on your mortgage payments and if your credit history is still strong.

There are other options even if you’ve already fallen behind on your payments. Your options depend on how far you’re behind and your financial situation.

Know Your Rights

Facing a possible foreclosure can be quite traumatic for any individual, but remember this. You are not the first person to be in this position, and there are protections and rights established to help you navigate the crisis. Make sure you know what those safeguards are.

Specific protections vary from state to state, so check your state’s policies. Look for:

• The right to be informed by your mortgage servicer of all your options for avoiding foreclosure after you ask for assistance.
• The right to timely responses from your mortgage servicer when you request information or explanations.
• The right to an accurate copy of your payment history, if you request it from your mortgage servicer.
• The right to foreclosure mediation with your mortgage servicer or their representative.

Know your rights as well as your obligations. Read your mortgage documents carefully, becoming familiar with your situation before a crisis arises.

Discuss the Situation with Your Lender ASAP

If you’ve only missed a few payments, get in touch with your lender immediately. If a temporary setback prevented you from making timely payments, your lender may work with you. In many cases, they can:

• Create a repayment plan, adding part of your overdue balance to future payments until you’re caught up.
• Offer forbearance, which temporarily pauses payments.
• Guide you toward a loan modification or government program.

Tip: Always open your lender’s mail. Early letters often contain the best foreclosure prevention options. Later notices may include legal deadlines you can’t afford to miss.

Here’s how the process usually unfolds:

• First month missed payment – Your lender will contact you by letter or phone.
• Second month missed payment – Your lender is likely to begin calling you to discuss why you have not made your payments. This is a good point to enlist your lender for any assistance that is available in order to avoid a third consecutive missed payment.
• Third month missed payment – After the third payment is missed, you will receive a letter from your lender stating the amount you are delinquent, and that you have 30 days to bring your mortgage current. This is called a “Demand Letter” or “Notice to Accelerate.” If you do not pay the specified amount or make some type of arrangements by the given date, the lender may begin foreclosure proceedings. They are unlikely to accept less than the total due without arrangements being made if you receive this letter. You still have time to work something out with your lender.
• Fourth month missed payment – Now you are nearing the end of time allotted in your Demand or Notice to Accelerate Letter. When the 30 days ends, if you have not paid the full amount or worked out arrangements, you will be referred to your lender’s attorneys. You will incur all attorney fees as part of your delinquency.
• Sheriff’s or Public Trustee’s Sale – The attorney will schedule a sale. This is the actual day of foreclosure. You may be notified of the date by mail, a notice is taped to your door, and the sale may be advertised in a local paper. The time between the Demand or Notice to Accelerate Letter and the actual sale varies by state. In some states, it can be as quick as 2-3 months. This is not the move-out date, but the end is near. You have until the date of sale to make arrangements with your lender or pay the total amount owed, including attorney fees.
• Redemption Period – After the sale date, you may enter a redemption period. You will be notified of your time frame on the same notice that your state uses for your Sheriff’s or Public Trustee’s Sale.

Grants & Government Programs

There are any number of possibilities for mortgage assistance from state and federal government agencies. You can check for your state’s resources here. Federal programs are often specific to the agencies that help people get mortgages in the first place, such as the Veterans Administration and the FHA.

The Department of Housing and Urban Development (HUD) has up-to-date information about federal programs, including the VA and FHA. Keep in mind that programs change, especially after a change in presidential administrations. That makes current information especially important.

For example, the Homeowners Assistance Fund was established by the Treasury Department to provide aid in the wake of the COVID-19 pandemic and related economic troubles.

File a Lawsuit to Stop the Foreclosure

This option isn’t easy if money is a major problem. Lawyers cost money, and you could spend money and wind up losing a case and, potentially, your house.

Not all foreclosures happen in court. Some states allow non-judicial foreclosures, which can happen when a mortgage agreement contains a “power of sale” clause giving the lender the right to foreclose on a property without going to court. If that’s the case, you can stop or slow down the foreclosure by suing the lender.

To stop the foreclosure, your lawsuit would need to prove:

• The lender doesn’t own the promissory note
• The lender did not comply with a state mediation requirement
• The lender violated a state law
• The lender didn’t follow all required steps in the foreclosure process (as determined by state law)
• The lender made another significant error

This strategy has risks. If you don’t prove your case, the foreclosure will proceed. If your case is ruled to be frivolous, you may be on the hook for the lender’s court costs and attorney fees.

Loan Modification to Stop the Foreclosure

Before things get so desperate that lawsuits and bankruptcy are your only alternatives, apply for a loan modification – lowering the interest rate or even forgiving some of the principal on the loan. You may get the bank to drop fees and penalties you’ve run up. The lender would really rather have you succeed in paying down the mortgage than go through the trouble of taking it from you and then selling it.

You can’t wait until the last second, but this can avert or at least slow down the foreclosure process. The lender may be prevented from dual tracking (proceeding with a foreclosure while a loss mitigation application is pending). If the lender agrees to the modification, the foreclosure is stopped as long as you keep up with the adjusted payments.

In addition to bank-run loan modification programs, there are government-run programs that help borrowers who are behind on their mortgages: Fannie Mae’s High Loan-to-Value Refinance Option and, from Freddie Mac, the Enhanced Relief Refinance program.

Lender Solutions for Temporary Setbacks

A forbearance pauses your mortgage payments for a time. It doesn’t reduce what you owe but postpones the payment of that amount. The balance may be deferred until the end of your mortgage or paid back under a repayment plan or loan modification.

While in forbearance, you’re expected to be getting back on your financial footing so you can resume making regular monthly payments, plus what you accrued during forbearance.

Another option is to request a reinstatement total from your lender. This means an amount that includes missed payments, any late fees and all legal fees. If you are able to pay this amount, your mortgage may be reinstated at the point where you fell behind in monthly payments.

You could also pay off the entire amount of the loan, which would eliminate the need for any foreclosure proceedings.

These options are based on your resources. If you fell behind on your mortgage but you have the ability to make (or borrow) a reinstatement amount or the entire mortgage, you may be best served just doing that and extricating yourself from the entire situation. For most people, forbearance or renegotiating the mortgage may be more realistic options.

File Bankruptcy to Stop the Foreclosure

Most options are meant to help you avoid bankruptcy, which has a considerable impact on your credit rating, and it might not ultimately keep you in your home. But if you’re down to the wire – the foreclosure sale is days away – bankruptcy is the best way to stop it immediately.

Once you file for bankruptcy protection, your creditors – mortgage lender included – have to suspend collection efforts immediately. This is known as an “automatic stay.” You still owe the money, but even if the mortgage lender asks the court to resume the foreclosure, this buys a couple of months or so to find a new job or solve whatever other short-term financial problem that keeps you from paying your debts. This also gives you a chance to work with creditors on a repayment plan so you might avoid having your home sold to pay your debt.

There are two types of bankruptcy that apply. Chapter 13 bankruptcy, which is designed to restructure your debts so you can pay them off over three to five years, is best if you’re trying to keep your home. Chapter 7 bankruptcy, which liquidates your debts, might be the choice if you’re stalling for time and have accepted that you’re going to lose your home. You can use that time to save money to rent a place.

Avoiding Foreclosure Options Where You Don’t Get to Keep Your Home

When the stakes are this high, when your home could be lost to you, your goal is to avoid the worst outcomes. There are a few last-ditch options.

Conduct A Short Sale

In a Short Sale, the bank or other lender agrees to accept less than the total amount owed by a homeowner in order for the house to be sold to a third party. It’s a fine line: The homeowner isn’t losing the house, but is selling it at a loss for both himself and the lender.

You have to get the lender to agree to this before selling the house. The advantage to the lender is avoiding the trouble of foreclosure. The advantage to you is avoiding the credit hit you would take from foreclosure.

Sign A Deed In Lieu Of Foreclosure

A deed in lieu of foreclosure is similar to a short sale in that you don’t keep your house. You agree to hand the title over to the mortgage company. The hit to your credit score from a deed in lieu may be less than that from foreclosure, and you may get quicker approval for new home financing.

Watch for Foreclosure Fraud

If there’s anything worse than dealing with foreclosure, it’s being scammed by those who prey on the financially desperate. To protect yourself, read the FDIC brochure “Beware of Mortgage Rescue Scams.”

Maryland’s state website offers more advice:

• Do not pay anyone in advance to assist you with a loan modification or other foreclosure prevention program. In most situations, charging upfront fees for these services is illegal. Call 1-877-462-7555 for a referral to a housing counselor who will provide free help.
• Do not stop communicating with your mortgage servicer and do not send your mortgage payments to a third party, unless you have written approval from your mortgage servicer first.
• Do not believe guarantees. Reputable assistance agencies will never promise that they can stop your foreclosure.
• Do be extremely cautious entering into an agreement with out-of-state companies, companies who partner with an out-of-state attorney, or businesses or individuals who identify themselves as “mortgage assistance relief professionals”, “loss mitigation consultants”, or “mortgage analysis and document review experts.”

Talking to Experts for Foreclosure Help

Clearly, avoiding foreclosure is complicated, and there are potential pitfalls that the average person is ill-equipped to navigate by themselves. You may need a lawyer to employ the strategies suggested on this page. This is especially true if your case goes to court, but an attorney may be able to keep you out of a courtroom in the first place.

The U.S. Department of Housing and Urban Development has a list of counseling agencies in each state who can help you avoid foreclosure. You could be eligible for a special Making Home Affordable loan modification or refinance to lower your monthly payments and stay in your home. HUD has a search tool to help you find a HUD-approved counselor.

Nonprofit housing counseling agencies partnering with the federal government provide foreclosure prevention counseling services free of charge.