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How to Avoid Foreclosure: Where to Get Help
Lots of people are struggling with how to pay for their mortgages right now. The pandemic has wreaked havoc on the nation’s economy, and in turn, the job market. Nearly 10,000 United States properties faced foreclosure in August 2020 alone, up 11% from the month prior.
Times are tough, but you are tougher. You can avoid foreclosure if you learn your rights, understand how you can get out of this situation and know where to turn for help if, or when, you need it.
What is a mortgage foreclosure?
Mortgage foreclosure is a legal process where the lender you borrowed the money for your home from takes ownership after a period of default on your part. This happens when you get seriously behind on your mortgage note and the mortgage lender or bank repossesses the house and gains its title. In most cases, the house will then be sold off by the lender to recoup the lost payments and balance of the mortgage loan.
There are two types of mortgage foreclosures: judicial and non-judicial. A judicial foreclosure means the court legally supervises the process with proper legal proceedings. This type of foreclosure is, in essence, a civil suit against the homeowner from the mortgage lender.
A non-judicial foreclosure, on the other hand, is a foreclosure that’s handled in-house by the lender without involving the courts. To foreclose, the homeowner gets a legal notice of foreclosure served to them. The lender may also put a notice in the local newspaper for a set period, but the rules vary depending on where you live.
Most states allow for foreclosures to begin 60 days after the first missed payment. This varies greatly, however, depending on how favorable a state’s laws are to homeowners. Yet, just because a foreclosure began doesn’t mean all hope is lost. It is crucial to take action as soon as possible.
How to avoid foreclosure
The first step to avoiding foreclosure is getting ahead of the problem by contacting the mortgage lender you work with. If you know you can’t make your payment on time (or at all), your best bet is to reach out to the lender and see what options are open to you. Most lenders have programs in place to help people who can’t make their payments due to hardships that are out of their control, so you need to ask before the problem gets out of hand.
When you reach out to your lender, make sure to:
Gather all relevant financial information.
Before you make the call, pull together your mortgage statements, all other monthly debt payments (e.g., student loans, car loans, credit card payments) and your income details (tax returns and pay stubs). Have paper copies ready to go to source information from for the lending company. In some cases, they may ask for documents to prove the hardship.
Explain what is going on.
Now is not the time to let your ego dominate the conversation. It can be hard to admit you’re struggling, but be truthful when explaining why you are or will be missing your mortgage payments. Medical problems, job loss and mental illness can all be factors that play heavily into the solutions you’re offered, so be up front about the issue.
Ask for time.
Pausing or reducing mortgage payments for a limited time period is known as forbearance. Forbearance plans are common right now due to the economic toll the nation paid for COVID-19. A lot of people are out of work, and most lenders would rather wait for you to catch up on payments than toss you out of your home — especially if you’re dealing with a job loss or other hardships.
Ask to spread payments out.
A repayment plan allows you to add a certain amount of money to each future payment to catch up. If your mortgage is $1,000 a month, then your mortgage lender may allow you to add $200 per payment (or some other amount you agree on) to get in good standing.
Ask to change the loan’s terms
Is your mortgage interest rate an adjustable rate? Are there other loan terms that are making it temporarily difficult to repay your mortgage? The lender may agree to decrease the interest rate to help you avoid foreclosure. This is known as a loan modification. It’s not the most common fix for being in default, but it is one of the options that a lender may offer.
Ask to refinance.
Does your home have sufficient equity? Are you still in good standing on your mortgage loan? If you and your home meet the mortgage lender’s refinancing requirements, it may be possible to refinance at a lower rate or for a longer term to help lower your monthly mortgage payments. You need to work on this fix prior to going into default, though, or you won’t get approved.
Ask for a loan through the FHA Home Affordable Modification Program.
There are government programs designed to help people with certain types of government-backed mortgages who are in danger of foreclosure. These loans are called a partial claim and the money from them is applied to any missed payments. Your lender can guide you where to go for this.
Note, though, that this type of loan isn’t free — you won’t pay interest on the money you borrow in some cases, but you will have to pay the loan back at some point. You’ll also have to have an FHA loan to take advantage of this program.
Options after a foreclosure notice
Depending on where you live, a notice of default (NOD) may happen after 60 days of no payments or after a certain number of missed payments. This type of notice alerts you to an impending foreclosure and you need to take it seriously if you get one.
There are options even after receiving a NOD, however, and losing your home isn’t inevitable.
You can try to avoid the foreclosure with a:
Short sale: Your lender will start the foreclosure process on your home after they file a NOD.The lender must consider any offers from buyers if foreclosure happens — and it’s a long, drawn-out process for them to deal with. Try to work out a short sale with your lender instead.
Providing your lender with a short sale — which is an offer to buy the home from a potential buyer for less than is owed on the house — saves the lender the time and hassle of finding a qualified buyer for the home. If the lender does foreclose, they will have to attempt to sell it anyway, so offering up a short sale may save them the headache.
Foreclosure workaround: Before your home is foreclosed upon, you can try to work out a plan with the lender that avoids it completely instead. Transparency is key. Be truthful and see if the lender can stall the foreclosure until you are on your feet.
Bankruptcy: Filing bankruptcy is a last resort to solve a financial situation you may not be able to get out of on your own. Doing this will have lasting credit repercussions but it could help you keep your home. In some cases, filing for bankruptcy will help to delay a foreclosure or save your home because the court will issue an automatic stay when you file that stops creditors from trying to collect on debts. This can include your home, even if you’re late on payments. The court will act as a mediator between you and your creditors to find a solution, and while it may not keep you in your home over the long haul, it will buy you some time.
Deed in lieu: This is handing your deed over to your lender in lieu of being foreclosed on. You sign the deed in lieu of foreclosure, which means that you lose your investment in your home to the lender, who will sell it to recoup their losses on the loan. This route will have the same effect a foreclosure does on your credit, but it will get you out of your foreclosure. If there are no short sales and foreclosure is inevitable, your lender may agree to this solution.
- Mortgage foreclosure is a legal process where the financial company that lent you money for the home takes ownership after you default on your loan.
- The first step to avoiding foreclosure is getting ahead of the problem by contacting the mortgage lender.
- Be vigilant with mortgage payments and be up front and honest with your lender if you cannot meet the loan requirements. Most lenders will have options or programs in place to help homeowners who can’t pay their mortgages due to hardships, so you need to ask and be honest about where you’re at.
- Keep all financial paperwork to create a trail to prove what type of help you need and which programs you may qualify for.
- Foreclosure does not mean all hope is lost. There are ways around it if you act early and work with your lender to resolve the issue at hand.