How to Avoid Foreclosure
Steps to avoid foreclosure or at least minimize its impact.
Millions of Americans have lost their homes, and foreclosures in the U.S. hit record numbers in 2009. If you're having trouble paying your mortgage, learn about the steps you can take to avoid foreclosure or to minimize your debt after it happens. Quick action is the key to success it can save your home and/or help protect your credit rating.
Don't Walk Away: Consider Your Options
Don't give up and let the lender foreclose on your home without considering your options. A foreclosure will hurt your credit rating and make it difficult, if not impossible, to buy another home anytime soon. In addition, if the profits from selling your home don't cover the unpaid portion of your loan, your lender might sue you for the rest.
Your best options if you're having trouble making mortgage payments include:
- negotiating with your lender
- getting government help
- filing for bankruptcy
- selling your home yourself, or
- giving your home deed to the lender.
These options are described in more detail below.
Beware of scam artists. People facing foreclosure are often preyed upon by others claiming they'll help. Some homeowners have unwittingly signed documents giving these scammers title to their property, thus turning themselves into renters. Don't sign anything without getting a professional opinion first.
Negotiating With Your Lender
As soon as you realize you'll have trouble paying your mortgage ideally, before you've missed any payments contact your lender. Lenders have an incentive to negotiate with home loan borrowers, if only to reduce the number of foreclosures they're dealing with. You might have to make a lot of calls to reach the right department or person, however.
Do it sooner rather than later. If you call soon, you may be able to work out a solution with your lender. But, if you've already missed three or four payments, it may be too late, and the lender may insist on foreclosure or have already sent your file to an outside servicing company, which may not welcome requests to deviate from its standard procedures.
Possible solutions. The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to redo the terms of your loan.
What to say when you contact your lender. Here's what you should ask for, in lender-language. (And, by the way, you'll probably need to get to the right department first it may have a name like "loss mitigation.")
- Forbearance. You make a reduced payment, or no payment, for an agreed-upon period of time. Usually, the lender requires you to make up the difference at a later time. The lender is most likely to agree to this if you can demonstrate that you will soon receive a bonus, tax refund, or some other extra cash.
- Loan reinstatement. You agree to make up your missed (or reduced) payments by a specific date.
- Loan modification. Your lender agrees to alter the terms of the loan so that you can better afford the payments. For example, the lender may agree to add your missed payments to your loan balance, to stretch out your loan over a longer term (which will lower your payments but result in more interest over the life of the loan) or to convert an adjustable rate to a fixed rate mortgage.
Getting Government Help
The U.S. government is working on various ways to help homeowners facing foreclosure. The two currently operating programs are:
The HOPE for Homeowners Act. This was enacted in 2008 to help homeowners refinance their currently unaffordable variable rate mortgages into affordable 30-year fixed rate mortgages insured by the Federal Housing Administration (FHA), if their lenders agree to participate. (However, critics allege that this program has helped far fewer people than intended.) For more information, see the HopeNow website at https://www.hopenow.com.
The Homeowner Affordability and Stability Plan. More recently, the Obama administration introduced a plan to help some homeowners refinance or obtain lower mortgage payments. For more information, see our blog post The Homeowner Affordability and Stability Plan as well as the government website, www.makinghomeaffordable.gov.
Note: Another refinance program you may have heard of, called "FHA Secure," expired on December 31, 2008.
Filing for Bankruptcy
Filing for bankruptcy may help you keep your home or, at least, get you out from under your mortgage. When you file, the foreclosure process is legally stopped (called an "automatic stay"). It can't be reopened until your bankruptcy case closes or the lender gets court permission to proceed (called "lifting the stay"). For more information, see Nolo's article How Bankruptcy Can Help With Foreclosure.
Selling Your Home
If you simply can't afford the house you own, the above options won't help. You will probably lose your home. But don't wait for your lender to make the first move. If your home has appreciated in value since you bought it, you may be able to sell it yourself. (In fact, real estate investors may show up on your doorstep hoping for a bargain.) Again, contact your lender, who may let you stop making payments until the house is sold.
Ideally, the proceeds from the sale will cover your mortgage and selling costs. But, if they won't, ask your lender to consider accepting what's called a "short sale." That means that the lender accepts the sale proceeds even if they're less than the amount you owe. It's not as easy as it sounds, though. For one thing, lenders are notoriously slow at granting this approval, leaving prospective buyers in limbo. Getting approval is often easiest if you can demonstrate that you or your family has endured some personal hardship (as opposed to having spent foolishly).
Another issue with short sales is that some lenders will keep trying to come after you for the remainder of what you owe. Contact an experienced real estate agent or attorney before proceeding with a short sale.
Handing the Deed Over to the Lender
If no one is interested in buying your house, your lender may agree to take the deed and cancel your debt. This is called a deed in lieu of foreclosure. The idea is that the bank can then sell your house (as with an actual foreclosure) but won't report it as a foreclosure to the credit rating agencies in fact, you can negotiate with the bank about how it can help you preserve your credit rating. (To learn more about this option, read Nolo's article Short Sales and Deeds in Lieu of Foreclosure.)
Short sales and deeds in lieu of foreclosure will no longer leave you owing taxes. In the past, the IRS considered forgiven debt to be taxable income. However, this was erased for situations where the loan was for a primary residence by the "Mortgage Forgiveness Debt Relief Act of 2007," or H.R. 3648. For more information, see Nolo's article How Bankruptcy Can Help With Foreclosure.
Next Steps
For more detailed information on how bankruptcy can help you if you face foreclosure, get Nolo's book Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen R. Elias and Robin Leonard. Also, Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo), contains everything you need to know to get out of debt and repair your credit.
If you're having trouble making your mortgage payments or are already in jeopardy of foreclosure, see Nolo's Bankruptcy and Foreclosure Blog or the bestselling The Foreclosure Survival Guide, now available online at no charge. Both are written by Stephen R. Elias, president of the National Bankruptcy Law Project.