Facing foreclosure on your home can be a scary prospect. You're months behind on your mortgage payments, letters from your lender are piling up and you fear losing your home. Fortunately, you can take steps to avoid losing your home to foreclosure.
Foreclosure happens when a borrower falls behind on mortgage payments, and the lender that issued the loan seizes the property. Once the home is seized, the lender will sell it to try to recover at least some of the money that the owner borrowed. In many cases, a lender won't start the foreclosure process until a mortgage is 120 days past due.
Here are eight tips for stopping a foreclosure.
1. Reach Out to Your Lender
Contact your lender or loan servicer about a remedy as soon as possible, and be ready to explain your financial circumstances. 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 pause mortgage payments or make lower mortgage payments.
- Loan modification changes the terms of the loan; a common example is the reduction of monthly mortgage payments.
If possible, reach out to your lender before you start missing mortgage payments. Once you begin missing payments, you may get a notice of default representing the first step in the foreclosure process. Some lenders send this notice to borrowers as a formal warning that the home will be seized if overdue mortgage payments aren't made by a certain date. This window of time is known as pre-foreclosure.
Whatever you do, don't ignore letters, emails and phone calls from a lender or loan servicer that's seeking mortgage payments. If you do ignore this outreach, the lender or loan service might proceed with legal action to initiate a foreclosure.
2. Seek Help From a Nonprofit or Government Agency
A number of nonprofits and government agencies can provide help if you're facing foreclosure. They often provide their services at no cost. Here are some of those nonprofits and government agencies:
- Homeownership Preservation Foundation helps financially troubled homeowners.
- NeighborWorks America is a nationwide network of nonprofits.
- National Foundation for Credit Counseling is an umbrella organization for financial counseling agencies across the U.S.
- A foreclosure prevention counseling service in your state may be able to help.
- Federal Housing Administration National Servicing Center assists homeowners who have FHA mortgages.
As you're trying to stop foreclosure, beware of "rescue" scams. Some for-profit companies that advertise themselves as mortgage consultants, foreclosure services or something similar may promise to "save your home" or "pay your mortgage," but they're likely just trying to rip off anxious homeowners.
3. Sell Your Home
Before your home is seized, you might be able to sell it to cover the mortgage debt. If the home ends up selling for less than what you owe, this is known as a "short sale."
A twist on this option is selling your home for equity. If you have equity in your home, meaning it's valued at more than what you owe on the mortgage and other home-related debts, you might look into selling your home to wipe out your mortgage debt and keeping what's left (the equity).
The selling-for-equity option may be ideal if you're struggling with financial hardship and can't keep up with your mortgage payments. Aside from clearing away your mortgage debt, selling with equity steers clear of the severe credit harm a foreclosure would cause.
4. Arrange a Loan Assumption
A loan assumption might be an alternative to an outright sale of your home. Your loan servicer may be willing to let another buyer take over your mortgage debt and mortgage payments, even if the mortgage started out as non-assumable.
Keep in mind that refinancing your mortgage typically isn't an option for avoiding foreclosure.
5. Agree to a Deed in Lieu of Foreclosure
A deed in lieu of foreclosure lets a homeowner voluntarily hand over their house to a lender in exchange for erasing their mortgage debt and avoiding foreclosure.
The deed-in-lieu process can help you avoid hassles associated with foreclosure, including court proceedings, court judgments and home auctions. Meanwhile, the lender can sell your home to recover at least some of the unpaid mortgage.
The National Association of Realtors lays out these scenarios when a lender might opt for a deed in lieu of foreclosure:
- Demonstrated financial hardship
- Delinquent payments for a long extended period with no ability to make mortgage payments.
- No qualification for loan modification
- Unsuccessful attempts to sell your home
Deed in lieu of foreclosure will still result in harm to your credit, but likely not as much as a foreclosure otherwise would.
6. Consider Hiring an Attorney
Depending on your situation, you might consider hiring a foreclosure attorney. You may even be able to find an attorney who provides services at no cost, or to 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 stops foreclosure.
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 think the foreclosure action is illegal.
7. File for Bankruptcy
Bankruptcy should be used as a last resort if you're facing foreclosure on your home.
Seeking Chapter 7 bankruptcy merely postpones a foreclosure. Meanwhile, Chapter 13 bankruptcy might 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 pick this option, weigh the serious consequences that bankruptcy has on finances and creditworthiness, as it may be difficult to bounce back from a bankruptcy. A Chapter 7 bankruptcy generally stays on your credit report for 10 years, and a Chapter 13 bankruptcy typically remains there for seven years.
8. Keep Up With Mortgage Payments
It may sound obvious, but regularly making mortgage payments is the best way to avoid foreclosure. Of course, this can be tough if you're dealing with financial hardship.
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 payments. Or you might pick up part-time work, cut expenses and tame your debt to help generate more money and head off foreclosure.
How Does a Foreclosure Impact Your Credit?
Aside from bankruptcy, foreclosure is one of the worst things that can happen to your credit. That impact doesn't last forever, though. Here are some ways that a foreclosure affects your credit:
- Lower credit score: The appearance of a foreclosure on your credit report can decrease 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 are on your credit report. The missed payments leading up to foreclosure will have already had a negative impact 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 fall off your credit report and will no longer affect your credit score.
- Difficulty securing another mortgage loan: Even if your credit score has improved in the time since your foreclosure, its presence on your credit report could disqualify you from getting another mortgage. Some lenders won't consider approving a borrower if a recent foreclosure shows up 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, stay on top of your expenses so you can remain in your current home and enjoy financial stability. 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.
Throughout the process, and even long after, it's critical to keep an eye on your credit. Experian credit monitoring can notify you about score changes and things like new inquiries or suspicious activity detected in your Experian credit report.