How to Avoid a Foreclosure
Being a homeowner comes with a lot of excellent benefits. But what happens when you fall behind or can no longer make your monthly mortgage payment? You could potentially be at risk of foreclosure if your situation worsens.
Facing foreclosure is never fun: In fact, it can further strain your credit, employment, and personal health. Although the number of foreclosures declined in 2020, over 214,000 households were in the foreclosure process1.
The good news is that if you are having trouble making your mortgage payment, there are several steps you can take before you ever even get to the foreclosure process. Knowing your mortgage rights and working with your lender will be vital to reaching a solution.
If you have been telling yourself that foreclosure is your only option, here are steps that might make you think twice and help you to avoid foreclosure proceedings.
Gather and Organize Your Documents
If you see yourself falling behind on your mortgage payments, it may be due to poor planning than anything else. An example of an excellent strategy would be to gather your monthly billing statements first, then review your budget to ensure you have a system in place to stay abreast of future payments.
You may find that setting up a monthly autopay or sweep from your checking or savings account that gets applied to your monthly payment on a designated day of the month may prevent you from missing your payment due date.
Other things to consider are changes in your escrow if your lender handles paying your property taxes and insurance each year. Your lender should send you an escrow analysis every year to help determine the projected expenses for that upcoming cycle.
Another good idea is to review your payment history to ensure your applied payments were accurate. Sometimes lenders and servicers make mistakes too. If an error occurs, contact your lender for other potential options and to avoid any late charges due to discrepancies.
Understand Your Mortgage Rights
If you still find yourself at risk of foreclosure even after reviewing all your documents, it might be a good idea to brush up on your mortgage rights.
In general, federal law doesn't allow lenders to start foreclosure proceedings until you are 120 days delinquent on your mortgage payments. You can also comb through your mortgage document and promissory note, which should also detail provisions should you fail to uphold your obligation.
There should be language that details how you can reinstate your loan if you catch up on past due payments and pay your late charges. Sometimes lenders can charge other fees if you fall behind on payments that you may also need to pay.
In addition, the state's foreclosure laws pertain to how long you have to work out a deal, as well as any protections you may receive as a consumer when going through the foreclosure process.
Also, always communicate with your lenders or servicers to see any alternatives that might be eligible for you. It's also a helpful approach to get help with information from the U.S. Department of Housing and Urban Development (HUD).
A HUD-approved local credit agency offers free counseling to assist you in finding programs available to help you avoid foreclosure2.
Consider These Foreclosure Alternatives
If you are really in a bind, your lender or servicer may determine you are eligible for a loss mitigation plan. By agreeing to one of these plans, you may be able to avoid the whole foreclosure process.
Refinancing Your Mortgage
Another alternative to avoid foreclosure is to refinance your mortgage, which allows a longer payment term with lower monthly repayment. Additional advantages of refinancing for homeowners are possible lower market interest rates or seizing cash out a portion of their equity.
If you're thinking of refinancing, you should search around for the best deal for you and your financial status.
Ask For Forbearance or Deferment
If refinancing isn't an option, you might be able to ask your lender to forbear (or suspend) your monthly payments temporarily or defer them for a period of time. However,
It's important to understand that this does not mean your payments are forgiven. The postponement involves a lender suspending your payments for the period, and while there is no interest fee, you must make the payment with agreed plans. Usually, lenders or services will require proof of financial difficulties before you are qualified.
Request a Loan Modification
Suppose your temporary workout plan has expired, or you are unqualified altogether. Another alternative could be asking for a permanent change to your loan terms through a loan modification.
Unlike a refinance where you apply for new credit terms, a modification changes your existing credit terms. In some cases, it could involve extending the amount of time you have to pay off your loan or even reduce your interest rate.
Consider Selling Your Home
While it is not ideal, selling your home is another way to avoid foreclosure if you have exhausted all your other options.
The benefit of selling your home before it gets to the foreclosure stage is that you might be able to sell it for a profit still if you have enough equity built up. It's not the best outcome, but as home prices climb and inventory remains low, it may be easier to sell your home while demand is high.
One way to sell even faster is to set your asking price below current market prices. You can then use the profits to rent or downsize to a home with a mortgage that might be more manageable based on your new circumstances.
1 Ostrowski, J. (2021, January 22). Foreclosures Fell To Record Low In 2020 -- With An Asterisk. Retrieved July 6, 2021, from https://www.bankrate.com/mortgages/foreclosures-fell-to-record-low-in-2020/#:~:text=Despite a deep recession, the, according to ATTOM Data Solutions.
2 U.S. Department of Housing and Urban Development. (n.d.). Homeowner Help. Retrieved July 6, 2021, from https://www.hud.gov/homeownerhelp