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How to Avoid Foreclosure

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  • Introduction

    • In order to avoid foreclosure, there are actions that you should take when you realize that you are unable to make your mortgage payments. Ideally, you'll begin early, research your options, and communicate with your lender throughout the process. There is also professional help available from federal and state agencies.

  • Credit Consequences of Foreclosure

    • In addition to the personal stress of losing your home, losing it through foreclosure can have adverse effects on your credit for years to come.
    1. Generally, a foreclosure will remain on your credit report for seven years.MSNBC: Which Is Worse...? (October 29, 2007)
    2. Future mortgage lenders take a foreclosure more seriously than a bankruptcy that didn't involve the house.MSNBC: Which Is Worse...? (October 29, 2007)

  • Step 1: Examine Your Budget

    • When you are experiencing financial difficulties, the first thing to do is to examine your budget to see if there are changes you can make that will help you afford to continue to pay your mortgage. Doing this will help later in the process as well, as you'll need to provide the bank with a budget if you formally request a hardship modification to your loan.
    1. Lay out your cash inflows and outflows.
    2. Look at the inflows first, to identify opportunities to increase the amount of available cash.
      1. Selling possessions, cashing out whole life insurance policies, or withdrawing from CDs can generate cash. These may be good options if your financial difficulties are expected to be short-term.Consumerist: How to Find Some Cash
      2. Taking on a second job may also be an option to generate income to make the mortgage payments.Consumerist: How to Find Some Cash
    3. Examine the outflows to determine if there are areas of spending that could be cut back.U.S. News and World Report: 8 Ways to Cut Back Without Sacrificing Lenders will want to see that you've examined all the options before beginning to negotiate loan modifications.

  • If You Decide You Can't Afford the House

    • After examining your cash inflows and outflows, you may realize that you've bought too much house. In this case, you may be better off making the decision to sell. The earlier in the process you make this decision, the more control you will have over the outcome.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)
    1. Contact your lender, let them know that you're placing the house for sale, and request that they hold off on foreclosing until you sell.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)
    2. You should prepare for the consequences of a "short sale"—this is when the house sells for less than you owe on the mortgage. Sometimes the lender will forgive the difference, but unless that happens, you are legally obligated to pay the lender the difference between the sale price and the amount due on the loan.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)
    3. You may want to ask if the lender will accept a deed in lieu of foreclosure, where the lender accepts the deed to the house as satisfaction of the debt. In this case, the lender will handle the sale; you turn over the deed and walk away from both the house and the loan.U.S. Department of Housing and Urban Development: Deed-In-Lieu Frequently Asked Questions

  • Step 2: Contact Your Lender

    • It is best to contact your lender as soon as you realize you're having problems. Don't stick your head in the sand and hope things will get better on their own. The bank may wait until you've missed a payment or two before beginning to negotiate, but you should inform them as soon as you know you have a problem.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)
    1. Ask for the loan workout department when you call.
    2. The lender might allow you to make up missed payments over a three- to 18-month period without a formal loan modification.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)
    3. If you think you're having a temporary problem, you may ask the bank for "forbearance," which would allow you to defer payments until the crisis has passed.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)

  • Step 3: Consider Loan Modification

    • A loan modification can usually only be done if the original lender still holds the loan. In a modification, you keep the original loan, but the terms are modified to make it easier to make the payments.Bankrate.com: Modify Or Streamline Your Mortgage to Save Money
    1. You may be looking for payments to be lowered by either having the interest rate reduced or having the term of the loan extended.
    2. If the market value of your home is now less than the amount of the mortgage, you may be hoping that some of your debt will be forgiven.
      1. If the bank forgives part of the debt, it will take a loss on the loan.Bankrate.com: Will the Federal Mortgage Plan Help You?
      2. This option will only be considered if the bank feels that the amount of the loss they would take by forgiving the loan will be less than what they would experience if they foreclosed.Bankrate.com: Will the Federal Mortgage Plan Help You?
      3. Banks would rather lower interest rates and extend the length of the loan than forgive part of the debt.Bankrate.com: Will the Federal Mortgage Plan Help You?
    • Although both federal and state programs exist to encourage banks to modify loans for homeowners in trouble, these programs provide incentives to lenders and do not provide financial assistance directly to homeowners. This means you must be prepared to negotiate any modifications directly with your lender.

  • Step 4: Consult an Attorney or Credit Counselor

    • You may wish to get professional assistance to help you explore your options. State laws vary on the process used and the protections provided to homeowners, so expert advice can help ensure you receive all the legal protections you're entitled to.
    1. If you hire an attorney, he or she should have experience with real estate and bankruptcy law.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007)
    2. Both the state and federal governments partner with agencies to provide credit counseling services at no charge.MSNBC: Which Is Worse: Foreclosure Or Bankruptcy? (October 29, 2007) U.S. Department of Housing and Urban Development: Tips for Avoiding Foreclosure
      1. A housing counselor will not only explain relevant laws and procedures, but will also counsel you on available options to save your home and help you agree to loan modifications with your lender. U.S. Department of Housing and Urban Development: Tips for Avoiding Foreclosure
      2. Select a U.S. Department of Housing and Urban Development (HUD) approved counselor. U.S. Department of Housing and Urban Development: . ..Housing Counseling Agencies
    3. Steer clear of companies that promise to prevent foreclosure for a fee.Better Business Bureau: Foreclosure Rescue Scams

  • Conclusion

    • Losing your home to foreclosure is a horrible experience. In order to attempt to avoid experiencing foreclosure, you must assess your financial situation, contact your lender early, and continue to communicate with them throughout the process. Sometimes you'll be able to save your home, but even if you can't, avoiding foreclosure will help save your credit rating and preserve your ability to buy another house when your circumstances improve.

  • References for How To Avoid Foreclosure



 


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