If you have a mortgage and don’t pay, you may face foreclosure. Foreclosure allows lenders to recover some of the amount owed to them by selling or taking ownership of the mortgaged property. Less than one percent of homes face foreclosure, but at least ten percent of homeowners seriously worry about it.
Ultimately, the best way to avoid foreclosure is to avoid the situations which cause it, such as taking on excessive amounts of debt, not having any savings, or buying a house you can’t afford in the first place. If you find yourself facing foreclosure, however, keep these options in mind.
How to Avoid Foreclosure
If you have any trouble making monthly payments, contact your lender immediately. They have a vested interest in working with you to see that payments are made. Besides contacting the lender, there are a variety of resources and programs available to help homeowners from foreclosing.
Reinstatement is a process where you can pay back mortgage payments in a lump sum before a specified date. This usually includes interest and penalty charges, but it can buy you some time.
Short refinance is where the lender forgives a small portion of your debt and refinances what is left into a brand new loan.
Forbearance is granted by lenders when they believe you to have a reasonable excuse for not making timely payments, such as illness or an unexpected change in income. A forbearance can temporarily lower or suspend your payments for a specified period.
With a mortgage modification, you can refinance or extend your mortgage loan and settle for monthly payments that are within your financial means.
As a very last resort, you can turn to a hard money loan from a private lender. Since they generally come with huge interest rates and fees, you shouldn’t consider this unless you have no other option to avoid foreclosure. You might strengthen your financial situation better by downsizing your home than by going deeper into debt to keep the one you have.
How the Process Works
While the foreclosure process varies from state to state, there are some basic steps.
- Defaulting on payment
- Notice of default
- Notice of sale
The first step is defaulting on the required monthly payments. Lenders will not usually pursue the foreclosure process after one missed payment, but they can. Most lenders understand that even responsible homeowners can miss payments and will try to work with the owner.
If you can’t make payments or agree on an alternative with the bank, lenders issue a notice of default, which begins the foreclosure process. This gives the homeowner 90 days to make a payment.
If you do not make payments within those 90 days, the lender issues a notice of sale, stating their intent to sell the home at auction within 21 days.
After a home is purchased at auction, the new homeowner must serve the current occupant a three-day written notice of eviction. If the occupant doesn’t move, they can begin formal eviction proceedings. Generally, you should move without making the new owner evict you.
When Foreclosure Is Unavoidable
Sometimes you simply can’t avoid a foreclosure anymore. In this case, there are strategies to help soften the financial blow:
- Pre-foreclosure or short sale
- Deed in lieu of foreclosure
If you’ve been given a notice of default, you can always sell your home. If your home is worth less than the amount you owe, you might qualify for a short sale. In a short sale, you sell your home for less than its value, and the lender usually forgives the difference. You must receive the lender’s approval beforehand. A short sale will still affect your credit, but not with the same impact of a foreclosure.
You can sign a deed in lieu of foreclosure, which means you turn the property over to the lender in exchange for them forgiving the mortgage.
Bankruptcy is another option. While it won’t permanently stop the foreclosure, declaring bankruptcy effectively halts the foreclosure and buys you more time.
How to Recover from Foreclosure
Foreclosure isn’t the end of the world, but it can be damaging for your financial health, especially how it impacts your credit score. While the negative impact decreases every year, the foreclosure still shows on your report for seven years.
To start recovering, you must understand why you went into foreclosure. You need to ensure you avoid those pitfalls and scenarios going forward. For more information about steps you can take, contact us to be connected to an experienced financial advisor.