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Finally attaining the home of your dreams—or any home—doesn’t mean it will be safe from foreclosure. A crisis could come that puts you at risk for foreclosure, especially if your dream house entails big mortgage payments.
If your home is at risk of foreclosure, the problem should be addressed immediately—one wrong move could spell disaster. However, by taking the proper steps, this disaster can sometimes be averted.
Key Takeaways
- There are options you can take to prevent your lender from foreclosing on your home.
- If you can gather enough money to pay back your missed mortgage payments in one lump sum, then reinstatement of the mortgage is possible.
- You can negotiate a short refinance with your lender, in which some mortgage debt is forgiven, and the rest is restructured in a new loan.
- In the case of a sudden emergency that may soon be ameliorated, you can ask your lender to grant you a period of forbearance, during which mortgage payments are reduced or even suspended entirely.
How to Avoid Foreclosure
If your home is at risk of foreclosure, don’t start packing—take action. The following options for avoiding foreclosure should be easily available to anyone with a government-backed loan provider and built-in mortgage insurance, such as in an FHA loan.
Reinstatement
When you are behind on your mortgage payments, reinstatement lets you pay back the amount in lump-sum payment (which may include any interest and penalty charges) before a specific date.
Short Refinance
In a short refinance, the lender may agree to forgive some part of your debt and refinance the remaining debt into an entirely new loan.
Forbearance
Sometimes a short-term financial hitch, such as a medical emergency or a sudden, unexpected decrease in income, may not allow you to make mortgage payments on time. If your lender believes that you have a valid reason behind the missed payments, it may agree to help you out by granting you a forbearance.
Depending on your financial circumstances, your lender may consent to a repayment plan that temporarily lowers your payments—or even suspends them for a specified period. However, to secure this agreement you will have to assure your lender that you will resolutely abide by the new repayment plan.
The CARES Act directs that if a residential borrower is experiencing financial hardship due to COVID-19, they can be granted forbearance on your federally-backed mortgage loan for up to 180 days, with the option to extend for another 180 days (potentially relief for a total of 360 days).
Mortgage Modification
Loan modification allows you to refinance your mortgage loan or extend its term. The lender may settle for monthly mortgage payments that are within your financial means. However, to qualify for this alternative you need to persuade your lender that your monetary problems are only temporary and will soon be resolved.
Refinance With a Hard Money Loan
Your lender may refuse to refinance your loan if it considers you to be a high-risk borrower. In this case, you can contact a private lender to refinance with a hard money loan to stop foreclosure. Such loans generally have astronomical interest rates and fees, but one could allow you to buy the time you need to avoid foreclosure.
Refinancing your mortgage with a private lender as a hard money loan should be a method of last resort, as the interest rates and fees are extremely high.
When Foreclosure Is Inevitable
If your situation makes foreclosure unavoidable, here are some tactics you can use to dampen the financial blow.
Pre-Foreclosure Sale
If you are absolutely convinced about your deteriorating finances, then the only option left for you is to sell your home for less than the amount required to pay the mortgage loan. You may be eligible for this alternative only if you default on your mortgage payments by a few months or as specified by your lender. Also, you may be required to sell your home in a specific amount of time.
If you can’t bear to move out, you could sell your house to a friend or an investor who will then lease the home to you. The best way to do this is to sign a lease (or contract) that includes an “option to purchase” clause, which gives you the right to buy back your home once your finances have improved. However, this alternative does have significant risks, as the investor can borrow against your property or even sell your home without your authorization while you are leasing it.
Deed in Lieu of Foreclosure
Another way out is to willingly give your property to the lender in return for pardoning your debt. You will qualify for a deed in lieu of foreclosure only if you are unable to sell your home before foreclosure. The only advantage of this option is that you are rescued from a foreclosure and the bad credit record that inevitably results from it.
Bankruptcy will usually not buy you enough time to catch up on your debts; more often than not it merely postpones the inevitable.
Bankruptcy
Many people believe that filing for bankruptcy is an excellent solution to foreclosure. In reality, all bankruptcy can do is delay the foreclosure process and possibly buy you some time to catch up on your payments.
Once the bankruptcy-instated suspension is revoked, the lender can ask for a full payment, which may require that you apply for a refinancing loan. However, the chances of getting a refinance loan are almost zero at this point, because the bankruptcy declaration will have left you with a negative credit score.
The Bottom Line
As a homeowner, it is up to you to take all the necessary steps to save your house from foreclosure. The easiest way is to stay away from situations that cause it. Excessive debt, adjustable-rate or exotic mortgages, insufficient emergency resources, lack of insurance, and buying a home you can’t really afford will all increase your risk of foreclosure.
It is important to scrupulously research the best interest rates available and pick the mortgage term that is right for you. For example, 40-year mortgages will typically allow you to make lower monthly payments than traditional 30-year fixed mortgages. That said, the interest rates for these mortgages tend to be higher. Use an online mortgage calculator to best estimate your total mortgage costs and plan ahead.
Occasionally, financial setbacks can get in the way of making regular mortgage payments. When this happens, the only wise thing to do is to immediately inform your lender about the situation. In most cases, they will be willing to cooperate with you and help you catch up. Often lenders are not interested in foreclosing on your house except as a last resort, because of the costs and time involved in the process.