How to Stop Foreclosure and Avoid Losing Your Home

When you bought your dream home, the last thing on your mind was that you might lose it due to foreclosure. However, sometimes poor financial decisions or circumstances outside of your control make it difficult, if not impossible, to pay your mortgage. When this happens, the bank steps in and begins the foreclosure process. What you may not realize is that foreclosure is not your only option. There are several things you can do to stop the foreclosure process and give yourself more time to catch up on your missed payments so you can stay in your home.

If you are faced with a mortgage payment you can’t afford, you can first try to find ways to make some more money. The more you make, the more you will have available to put toward the mortgage payment. This may seem obvious, but there could be several income sources that you are overlooking. Some ways you could increase your income are with a second job, a non-working spouse getting a job or selling items from your house. You can also reduce or eliminate some of your expenses, to free up more income for your mortgage.

This option is most effective when your financial hardship will be short term, as in unemployment or bills from an unexpected emergency. Once you find another job or pay off the bills, you will have enough money to pay your mortgage and the problem will be over. If your financial situation is permanent, however, you may have to consider other options. Your mortgage payment will not go away, and you will have to find a way to come up with the money to pay it every month.

At the first sign that you will not be able to make your mortgage payment, contact your lender. Foreclosure is an expensive process for the lender and they want to avoid having to seizing your home as much as you do. Many times your lender will be able to work with you to come up with a way to temporarily waive your payments or make them more affordable.

If you have already missed a few payments, don’t put your head in the sand and ignore the notices sent by your bank because this will only make the situation worse. By seeking help early, lenders are more likely to be able to work with you and come up with a solution that works for everyone.

Write a Hardship Letter

You may have to write a hardship letter to your lender explaining your situation and asking for specific help. Many of the options below will require you to write such a letter before the lender will take action. Briefly and honestly describe your financial situation in the letter and explain why you will not be able to make your mortgage payments. Tell the lender you are committed to coming up with a solution and ask for help. Send your letter by certified mail so you have proof that the lender received it.

Depending on your situation, your lender may offer you some of the following options.

Forbearance

If you can show that your finances will improve in the near future, your lender may let you delay making payments. This is most likely to happen if you have lost your job, have a sudden medical expense or are in another situation where your financial situation is not permanent. In many cases, this option is only available if you contact your lender before you start missing payments. You may be given a reprieve from payments for one month or several and interest will still accrue on the balance of your loan.

Repayment Plan

If you have missed several mortgage payments, your lender may work out a repayment plan with you to catch up on the delinquent amounts. If you know your finances will improve soon, you may be asked to pay the total of the missed payments in a single large payment as soon as the money is available. Your lender may also divide the missed payments up into smaller payments spread out over several months. These smaller payments would be in addition to your regular mortgage payment, which you would be expected to pay on time.

Loan Modification

Your lender may adjust the terms of your mortgage to make it easier for you to pay. If you have an adjustable interest rate, your lender may change it to a fixed rate or adjust it to a lower rate. If you have missed payments, your lender may add them back onto the principle of the loan and reamortize it. They may also give you the option of extending the loan period to a longer length of time to make your payments more manageable.

Partial Claim

If you have an FHA loan, you may be able to take advantage of the partial claim option in your loan terms. With a partial claim, you take out an interest free loan from the FHA insurance fund for your missed payments to bring them up to date. You then continue with your normal mortgage payments and the partial claim amount becomes a lien on your property that you will have to pay after you have paid off your mortgage or when you sell your home.

If you are in a situation where your financial hardship will be permanent, you may have to consider giving up your home. This is often a difficult and painful decision for a homeowner to make, but if loan modification or repayment plans aren’t an option, it may be your only choice. There are a few options available as an alternative to foreclosure when you can't stay in your home.

Selling Your Home at Market Value

If your home is worth more than you owe on it, you can sell it at or close to market value and pay off your mortgage with the proceeds. Find a realtor and list your home for sale, just like you would if you were selling your home under normal circumstances. Keep in mind that your goal is not to make a profit or to get back what you paid for it; your goal is to pay off your mortgage and prevent foreclosure. Be flexible and willing to negotiate in order to get a quick sale. Many lenders will hold off on foreclosure proceedings if they know you are actively trying to sell your home to pay off your debt.

Short Sale

If your home is worth less than you owe, you may be able to negotiate a short sale, also called a pre-foreclosure sale. Foreclosures are expensive and the lender ends up with a house that they have to sell themselves to recoup their losses. Your lender may agree to allow someone to purchase your home for less than the amount of the loan in order to avoid this headache. Your lender will need to be willing to cooperate with you on this, and they will have to approve any offers you get. The approval process can take several weeks and this may scare off some buyers. Also, short sales do affect your credit, but not as much as a foreclosure would.

Deed-in-Lieu of Foreclosure

If you know foreclosure is inevitable and you haven’t been able to sell your house, you can simply give your home back to the lender; this is called a deed in lieu of foreclosure. You will have to sign several documents turning the deed over to your lender, and your lender in turn agrees to forgive any debt. By taking this route, you avoid the embarrassment caused by the public foreclosure process and you may be able to get more favorable terms. A deed-in-lieu of foreclosure affects your credit less than a foreclosure does, but only slightly.

Losing your home to a foreclosure is a life changing event that you will hopefully never experience. If you find yourself unable to pay your mortgage, you can seek advice from a HUD approved counselor for free. Make sure you find out what your rights are and understand all of your options. Remember that mortgage companies don’t want your house, they just want to be paid. If you are pro-active early in the foreclosure process, you should be able to find a way to avoid foreclosure and either stay in your home or settle your debt.