Losing your home to foreclosure is a scary and depressing prospect. Aside from the short-term need for housing, there is the longer-term damage it does to your financial future.
But the one thing you can’t afford to do is be paralyzed by fear. You have to act. Fortunately, options exist to protect you and your home.
Get in touch with your lender as soon as you realize you may be in trouble. Lenders would rather have a paying customer than an empty house on their hands.
Filing for bankruptcy or a lawsuit can slow or stop the foreclosure process, but start by contacting your lender. You may be able to work out something that helps both parties.
What Is a Foreclosure?
Few people can buy a house with cash, so a mortgage is necessary. As long as the borrower makes the monthly payments until the mortgage is paid off, there’s no problem. However, if the borrower quits paying, the lender needs to be able to recoup its losses.
So, the house itself is the collateral for the loan. If the borrower can no longer make payments, the lender acquires the house through a legal process called foreclosure, so it can sell the house and recoup at least some of what is owed. Foreclosure evicts the homeowner from the property and damages the borrower’s credit score for 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. Paying your mortgage is a basic expense and losing the job that pays for it qualifies as an emergency. Those savings could allow you to keep paying your mortgage while finding another job.
If you don’t have that cushion and your finances have you questioning whether you’ll have the money to keep you monthly mortgage payments going, you have options. The options for defending yourself from foreclosure are better if you haven’t yet missed any payments.
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.
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.
File Bankruptcy to Stop the Foreclosure
Don’t be confused because this is the first option we’re listing: Bankruptcy is a last resort, not the first choice. It has 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 petition, 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.
File a Lawsuit to Stop the Foreclosure
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 may, 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.
Work It Out with Your Lender
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 craft a repayment plan to get you caught up. The lender will take what you owe in missed payments and add parts of it to your regularly monthly payments until you get caught up. Be honest with your lender: Don’t agree to pay more than you can handle.
Request a Forbearance
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.
Conduct A Short Sale
If you don’t quality for other forms of assistance, you may need to consider a short sale. You sell the home for less than you owe, with the proceeds going to the lender, who then forgives some or all of the remaining balance. 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’ll 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 your credit score will take with a deed in lieu may be less than 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.”
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.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
- N.A. (ND) Tips for avoiding foreclosure. Retrieved from https://www.hud.gov/topics/avoiding_foreclosure/foreclosuretips
- Tracy, P. (2020, November 4) Non Judicial Foreclosure. Retrieved from https://investinganswers.com/dictionary/n/non-judicial-foreclosure
- N.A. (ND) Foreclosure Avoidance Counseling. Retrieved from https://apps.hud.gov/offices/hsg/sfh/hcc/fc/index.cfm
- N.A. (ND) What are the differences between loss mitigation and loan modification? Retrieved from https://www.kolberlegal.com/what-are-the-differences-between-loss-mitigation-and-loan-modification/