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For the hundreds of thousands of homeowners confronted by it each year, foreclosure can be an emotionally and even physically draining experience. Fortunately, you may be able to stop foreclosure by tackling the situation head-on and taking proactive steps to turn things around.
Foreclosure occurs when a borrower falls behind on mortgage payments, and the lender that extended the loan seizes the property and sells it to try to recover at least some of the money that the property owner borrowed. In many cases, a lender won't start the foreclosure process until a mortgage is 120 days past due.
In March 2020, with a pandemic-caused recession looming, the Department of Housing and Urban Development established a moratorium on foreclosures for single-family homes purchased with a federally backed mortgage. That moratorium has subsequently been extended to at least June 30, 2021.
Moratoriums were almost certainly a big reason why the number of foreclosure filings fell to a 16-year low in 2020. Filings affected fewer than 215,000 homeowners last year, according to a review of foreclosure filings by ATTOM Data Solutions, a stark contrast to the more than 1.2 million foreclosures in 2007—the first year of the Great Recession. Foreclosures peaked at 2.87 million in 2010, the year after that recession was declared over.
Ways to Avoid a Foreclosure
Once a homeowner starts missing payments, a notice of default represents the first step in the foreclosure process. Some lenders send this notice to the borrower as a formal warning that the home will be seized if overdue mortgage payments aren't brought up to speed by a certain date. This window of time is known as pre-foreclosure.
So, if your home has gone into pre-foreclosure (or you fear it soon will), what are your options for keeping your home? Here are a few of them.
- Reach out to the lender or loan servicer about a remedy as soon as possible. You may be able to reach an agreement on a payment plan, a temporary forbearance or a modification of the loan terms. With a payment plan, you may be able to work out a way to catch up on past-due payments. A forbearance lets you temporarily make lower mortgage payments or pause mortgage payments. An example of modification is reducing the monthly mortgage payments. If at all possible, reach out to your lender before you start missing payments.
- Sell your home. Before your home is seized, you may be able to sell it to satisfy the mortgage debt. If the home winds up selling for less than what you owe, this is known as a "short sale."
- File for bankruptcy. Seeking Chapter 7 bankruptcy merely delays a foreclosure. On the other hand, Chapter 13 bankruptcy may let you catch up on past-due payments and keep your home. Chapter 7 bankruptcy wipes out most or even all of your debts, while Chapter 13 bankruptcy creates a plan for repayment of some or all of your debts. Before you forge ahead with this option, though, consider the severe consequences bankruptcy has on finances and creditworthiness, as it may be hard to recover from.
- Agree to a deed in lieu of foreclosure. A deed in lieu of foreclosure allows a homeowner to hand over their house to a lender in exchange for avoiding foreclosure.
Getting and staying current on your mortgage payments is the most obvious way to avoid a foreclosure, but this can be difficult, especially when you're already behind on payments. If you're experiencing financial hardship due to the pandemic or otherwise, you may be able to find financial assistance that helps you take care of bills and other needs so you can more easily afford your mortgage payment (more on that later). Picking up part-time work, cutting expenses and getting a handle on your debt are additional moves you can make to help you keep your head above water and prevent your home from being foreclosed.
How to Get Help With Your Foreclosure
Handling a potential foreclosure on your own can be tough. You don't need to shoulder the burden by yourself, though. Several options are available.
Seek Legal Advice
Depending on your circumstances, you may want to hire a foreclosure attorney. You may even be able to find an attorney who will offer services for free, or get assistance from an organization that offers free legal aid.
A foreclosure attorney can help you understand your legal rights throughout the process and, in some cases, may be able to find a legal defense that allows you to avoid foreclosure altogether. Foreclosure can be a complicated legal process for both the lender and the homeowner, and having a lawyer on your side can help. An attorney may come with a high price tag, but the cost may be worth it, especially if you believe you're being foreclosed on illegally.
Seek Help From a Nonprofit Group or Government Agency
A number of nonprofit groups or government agencies may be equipped to lend a hand—typically at no cost—with a pending foreclosure. To name a few:
- HOPE NOW, a coalition that works to prevent foreclosures.
- Homeownership Preservation Foundation, which assists financially troubled homeowners.
- Making Home Affordable program, a government initiative that provides mortgage help.
- NeighborWorks America, a nationwide network of nonprofits.
- National Foundation for Credit Counseling, an umbrella organization for financial counseling agencies across the U.S.
- A foreclosure prevention counseling agency in your state.
- Federal Housing Administration National Servicing Center, which assists homeowners who have FHA mortgages.
Beware of foreclosure "rescue" scams. Some for-profit companies that bill themselves as mortgage consultants, foreclosure services or something similar may promise to "save your home" or "pay your mortgage," but likely are just trying to rip off distressed homeowners.
How Does a Foreclosure Impact Your Credit?
Besides bankruptcy, foreclosure is one of the worst things that can happen to your credit. That impact doesn't last forever, though. These are some of the ways a foreclosure plays a role in your credit:
- Lower credit score: The appearance of a foreclosure on your credit report can bring down your credit score. How much your score drops depends on several factors, such as what you score was before foreclosure and how many other negative marks show up on your credit report. The missed payments leading up to foreclosure also will have a negative effect on your credit.
- Limited access to credit: For several years after a foreclosure, your ability to qualify for a credit card, loan or other lending product may be restricted.
- Long-term negative impact on credit report: Missed mortgage payments and foreclosure will be reflected on your credit report for seven years. After the seven-year period ends, the foreclosure will be removed from your credit report and will no longer affect your scores.
- Difficulty securing another mortgage loan: Even if your credit score has recovered in the time since your foreclosure, its presence on your credit report could disqualify you from getting a mortgage loan in the future. Some lenders won't consider approving a borrower if there's a recent foreclosure in their credit history. If you are approved, expect to pay higher interest rates or extra fees.
The Bottom Line
If you're on the brink of a home foreclosure or have already been through one, be sure to keep on top of your expenses so that you can stay in your current home and stay financially comfortable. Even more important, don't ignore a foreclosure or pre-foreclosure (such as failing to read mail or answer phone calls from a lender or loan servicer). Doing so could make it harder to hang on to the house you worked so hard to buy and maintain.
Throughout the process, and even long after, it's important to keep a close eye on your credit. Experian credit monitoring can alert you to score changes and things like new inquiries or suspicious activity detected in your Experian report.