Foreclosure & Alternatives Law
How To Avoid Foreclosure
During challenging times of financial hardship, an increasing number of homeowners find themselves in the difficult and unfortunate position of anticipating foreclosure of their properties. While the foreclosure process can threaten homeownership, there are ways to prevail by communicating with your mortgage loan servicer or exploring loan modification or refinancing options.
While a Chapter 7 bankruptcy or a Chapter 13 bankruptcy under federal law might provide an automatic stay (temporarily halting) of the foreclosure process, a foreclosure action in court or a nonjudicial foreclosure outside of court and pursuant to state law will ultimately result in successful foreclosure proceedings in favor of your lender. You should seek legal advice from a qualified real estate law firm for loss mitigation options, including mortgage relief.
Because lenders are in the banking business rather than the real estate business, foreclosure is expensive for a lender. If they can continue to receive monthly mortgage payments in one form or another, lenders would prefer to pursue any viable alternative to foreclosure. Homeowners also want to avoid foreclosure, not only to stay in their homes but also to avoid the impacts on their credit scores and reports.
Keeping up with mortgage payments is hard if you face a job loss or reduced hours. Receiving a call, letter, or email from your mortgage lender asking you to contact them is a high-anxiety situation. There are methods you can use to buy yourself some time and reduce your stress. The most important thing is to be honest about your financial situation and seek help when possible. You can often turn things around by communicating and using smart resources available to you.
The further behind you get on payments, the harder it is to catch up. Your mortgage company needs to have faith that you can make payments. The longer you ignore them and default on payments, the more likely you will lose your home. You need to contact your lender immediately, even if you are embarrassed or nervous about making the call. In most cases, a lender will understand that problems happen and that job losses are out of your control.
Don’t avoid your lender. Talk to them as soon as you start having trouble making your mortgage payments. Call or write to your lender’s Loss Mitigation Department to explain your situation. They will ask you for your financial information, such as income and expenses, and the reasons underlying your inability to pay.
If your situation is temporary, and you anticipate your income to increase or your expenses to decrease, and you are confident you can resume your mortgage payments at a specific time, then the mortgage servicer may be more likely to work out an arrangement with you.
Lenders do not want your house. They want you to keep your home and avoid foreclosure since it is the best way for them to get the money and interest you owe them.
If a house goes to foreclosure, the company has to deal with selling it to a new buyer and being paid a flat rate. They would not gain any money through interest, which is how most lenders stay in business. Accordingly, mortgage lenders have options to help borrowers through difficult financial times. You can find a solution together that allows you to stay in your home and avoid foreclosure.
They will likely have an honest discussion with you. They may even propose an affordable repayment plan. For example, instead of paying $1,500 a month, they may ask you to pay $800 a month until your income changes.
You must be honest with your lender and explain how long it may take you to find a job. You should also explain your current expenses that you cannot avoid, such as child support or daily childcare.
Your lender will start sending you emails or mail about your lack of payments. The first message you get should have helpful information about preventing foreclosure. These notices and prevention options help you handle financial problems before they worsen.
If you ignore the problem, they will start to send you warnings that they will take legal action. If your case needs to go to foreclosure court, failing to read these documents will not be an acceptable excuse for the courts.
You may qualify for a special forbearance of your mortgage payments. You may either be able to pay a reduced mortgage payment or suspend your payments altogether temporarily. In this case, your lender will work out a repayment plan with you where you would repay the portion owed either in a lump sum at a specific time in the future or gradually over time.
You may also qualify for mortgage modification and refinance your loan with different terms (either a reduced interest rate or an extended loan term) to make your payments more manageable.
Under state and federal laws, you have legal rights when you take out a mortgage. First, find your original loan documents. If you didn’t read them in-depth when you signed them, be sure to read them thoroughly in case of a pending foreclosure.
You need to know what happens if you can’t make your payments. Lenders may have a choice in how they take action, or the company might have a set path you need to take.
Every state has different foreclosure laws and time frames. You can learn more about yours by contacting your state government’s housing department in your state.
It is essential to educate yourself about preventing foreclosure, also called “loss mitigation.”
We recommend starting with these resources:
- Avoiding Foreclosure(from gov)
- Save Your Home(from the Federal Housing Commission)
- Foreclosure Resources(from the Federal Deposit Insurance Corporation)
- How to Get Government Help to Stop a Foreclosure(com)
- Foreclosure Prevention(Office of the Comptroller of the Currency)
Many of these resources explain the foreclosure process and provide tips in understandable language. It is crucial that you understand what is happening and how you can help yourself avoid foreclosure.
The U.S. Department of Housing and Urban Development (HUD) offers free or low-cost resources for you to use. They have financial and housing counseling available to you nationwide.
These housing counselors are here to help you understand the laws in your state. They will:
- Talk you through all your options
- Help you understand and organize your finances
- Represent you in negotiations with your mortgage company
- Communicate and work with your lender
You can contact a HUD-approved housing counselor by calling (800) 569-4287 or TTY (800) 877-8339.
These agencies can help you find out about programs that could help you. They may also be able to give you some credit counseling.
Keeping your home should be one of your biggest priorities, along with other needs of you and your family.
If you have not already done this, you must review your finances. In most cases, there are clear ways to cut out luxuries and reduce spending to make your mortgage payment.
Look for the obvious optional expenses even though they are the “fun extras” most people desire. Things like cable TV, a gym membership, or high-end grocery stores are things you can eliminate for a while.
If you have credit cards, it may be necessary to speak with your credit card company or a credit counseling agency about options for late or missed payments as well. This may mean interest costs add up, but it could give you time to catch up on mortgage payments.
You may need to sell assets that bring in money to pay your mortgage. You can often sell things like:
- Second or third cars
- Motorcycles, boats, or other “toys”
- Life insurance policies
Many of these items can be sold for cash. The extra money can help cover a month of your mortgage or help reinstate your loan. You can also take action to show your lender that you are committed. You or someone else in your household can get a second job or do side work to bring in some extra income. While this may not be enough to cover the mortgage, it will show your lender that you are serious about keeping your home.
You may be able to sell your home before it goes into foreclosure. Sometimes, the bank will accept the sale amount, even if it is less than what you owe on the mortgage, in a pre-foreclosure sale, sometimes referred to as a “short sale.” If not, the lender may be able to get a deficiency judgment, which would obligate you to pay the “deficient” amount you still owe the bank. Some states allow lenders to sue you for the deficiency, and some do not.
You can also try to give your home “back to the bank.” This is a last resort and sometimes not even available. However, if you qualify, sometimes a bank will allow you to “give back” your property – called a deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure is generally not as damaging to your credit as a foreclosure.
Please note that in these situations, if a lender accepts your home for less than you owe on it, or accepts a sale price lower than your outstanding mortgage, the amount of the “forgiven debt” may have tax consequences, depending on your situation. Forgiven debt is usually considered to be taxable income by the IRS. However, there are various options for relieving yourself of tax liability for the forgiven debt.
For instance, under the Mortgage Forgiveness Debt Relief Act, while you still have to report the forgiven debt on your personal residence to the IRS, it may be excluded for tax liability purposes. Also, you may not have to pay taxes on the forgiven debt if you are considered “insolvent.”
There are companies out there that claim to help you prevent foreclosure. The catch is that they ask for hefty fees to provide foreclosure prevention services to you. Avoid these companies and use the money to help pay down your mortgage.
While some of these companies’ plans may not be a scam, they charge high fees for information that you can get for free. They might offer to negotiate with your lender for you, but you can accomplish this with a free HUD-approved counselor instead. Avoiding companies like this can often save you thousands of dollars that can be put toward your mortgage instead.
Any person or business that says they can “immediately stop your foreclosure” should be a red flag. These companies will ask you to sign a document that lets them act on your behalf. Do not sign anything!
These scams can make you sign over your own house and then force you to rent it from them. Only sign something if you read it and fully understand the document. Have an attorney look the documents over if you can.
Every state has proper procedures that banks and homeowners must follow to effectuate or avoid foreclosure. Many states, such as Texas, Kansas, and Pennsylvania, provide for judicial foreclosure, which requires that a lender obtain permission from a court before foreclosing on your home.
Get professional advice from a real estate attorney, a trusted real estate professional, or a HUD-approved housing counselor before taking any actions regarding your foreclosure and mortgage.