Avoiding Foreclosure: What You Should Know
When a borrower misses on a mortgage payment, mortgage lenders can foreclose on the property. The property is then often auctioned off to recoup the money owed by the borrower. Foreclosures are caused by a variety of factors. Occasionally, homeowners fall behind on their monthly mortgage payments due to financial challenges such as medical emergencies or unanticipated loss of income.
Alternatively, some homeowners choose to foreclose on their property because the market value of their property has decreased, rather than keep up with their mortgage payments. Regardless of how foreclosure occurs, it can have a significant impact on a borrower’s credit score and future ability to get loans.
The foreclosure procedure cannot be stopped overnight. Before taking any action to avoid foreclosure, consult with an attorney. This will assist you in taking the appropriate measures and using any applicable defenses. You can also speak with a certified housing counselor to ensure that you’re exhausting all possibilities for retaining your house.
Here are some steps to take if you think you may be in danger of losing your home:
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1. Apply for Loan Modification
Get in touch with your loan servicer’s loss mitigation department as soon as possible if you’ve fallen behind on your mortgage payments. The terms of your initial loan may be permanently changed if you request a loan modification. A mortgage modification may result in a reduction of your interest rate, a reduction of your monthly payments, the elimination of past-due payments, the deferral of payments to a later date, or even the reduction of your loan balance. Your mortgage provider may decide to extend the duration of your missing payments or to issue a new mortgage loan in its place.
While you’re working with your lender, it’s crucial to keep everything in order. You should create a file for the records of your property and save critical loan paperwork in it. Monthly statements, property tax documents, escrow statements, and insurance details should all be included in this collection. Maintaining organization and adhering to application deadlines can assist you in avoiding a lender’s notice of default. Foreclosure begins when you get a notice of default, and your options begin to narrow immediately.
2. Get the Mortgage Reinstated
Even if you’ve received a notice of default, you can still apply for a reinstatement. Mortgage reinstatement is reestablishing your mortgage following a default by paying your arrears (amount of missed payments) plus any late fees. You can get a reinstatement quotation from your lender, which will include the precise amount necessary to restart your mortgage. Foreclosure fees will be included in your quotation if the foreclosure procedure has already begun.
3. Obtain a Temporary Hardship Forbearance Agreement
Forbearances are available if you cannot make your monthly payments because of a temporary hardship. A forbearance agreement is an arrangement in which the mortgage holder agrees to postpone or lower your payments for a certain period, often three to twelve months. In most cases, you’ll be asked to fill out a financial questionnaire and show verification of your lower income. If accepted, your lender waives the right to foreclose during the forbearance term.
One significant disadvantage of forbearances is that after the forbearance term expires, you must bring the loan current. This can be difficult if the lender requests a single payment in lieu of a repayment schedule. If you have a Fannie Mae or Freddie Mac-backed loan, you may delay repayment until the loan expires or until the property is sold or refinanced. However, even if your loan is not backed by Fannie Mae or Freddie Mac, you could still qualify for a repayment plan or loan modification after the forbearance period has expired. Your loan provider can discuss your alternatives with you.
Sadly, a homeowner’s financial circumstances may make foreclosing on their property unavoidable. If this occurs, there are methods to mitigate the financial impact and/or prevent having a foreclosure recorded in your credit report.
1. Execute a Deed in Lieu of Foreclosure
In a deed in lieu of foreclosure, the borrower gives over their property to the lender in order to avert foreclosure. You may avoid paying the rest of your mortgage if your state’s regulations and your mortgage holder’s policies allow. You should review the deed in lieu agreement with the help of an attorney or a representative from a housing counseling service. A deficiency judgment lawsuit from the lender should be avoided.
It may be hard to convince a mortgagee to accept a deed in lieu of foreclosure. You will most likely be unable to execute a deed in lieu if your property is subject to any second mortgages, home equity lines, or other non-mortgage obligations. Also, you might be taxed on any forgiven mortgage debt, as the International Revenue Service (IRS) considers forgiven debt to be income. To determine if you qualify for a tax exemption, see a tax specialist.
2. Suggest a Short Sale to the Lender
When you get authorization from your lender to sell your home for less than the balance of your mortgage, this is known as a short sale. If you reside in a state that allows mortgage holders to sue borrowers for the difference between the mortgage debt and the sale price, ensure that your mortgage lender agrees in writing not to sue you for this difference. You may choose to retain the services of a short sale attorney to assist you with the procedure.
To sell your property, you’ll also need to receive approval from any existing lenders, such as a second mortgage or home equity line. Junior lien holders, as they’re known, are unlikely to profit from the sale of the property. If you have tax liens, you must additionally obtain approval from the tax authorities that hold such liens. Short sales, like deeds in lieu, may result in income tax liabilities, therefore you should consult with a tax professional to see whether you are eligible for an exemption.
3. Start Bankruptcy Proceedings
Filing for bankruptcy is an easy way to stop a foreclosure — the automatic stay put in place by the court prohibits creditors from collecting on debts during the bankruptcy process. This includes foreclosing on your home. However, before taking this step, make sure that filing for bankruptcy is the best option for you by speaking with an attorney who specializes in bankruptcy law. With a Chapter 13 bankruptcy filing, you may keep your home whilst also paying off your outstanding mortgage payments over a 3-5 year timeframe.
You must be able to make your monthly installments on time. If you’re current on your mortgage and don’t have a lot of equity on your property, a Chapter 7 bankruptcy will typically allow you to keep your house. If you are in arrears with your payments, applying for Chapter 7 will simply postpone the foreclosure process. Should your mortgage company sell the home, you may be protected from a deficiency judgment because of this arrangement.
To Sum It Up
While foreclosure cannot be prevented overnight, there are steps you can take to postpone, avoid, or mitigate the consequences of a foreclosure. If you are temporarily facing financial difficulties, you may ask for a forbearance to lower your monthly payments. You can reinstate your loan by making all past-due payments current or by applying for a permanent modification of existing payment conditions. A short sale or deed in lieu of foreclosure is an option if foreclosure is unavoidable. Bankruptcy is another option for saving your property or delaying a foreclosure sale.