Foreclosure is an expensive process that can obliterate your credit score—but there are ways to avoid foreclosure.

Foreclosure is scary. Due to the coronavirus pandemic, millions of Americans are wondering if their homes will be foreclosed. This article will discuss what to expect when you can’t pay your mortgage, and how to best defend yourself against foreclosure. Luckily, there are a ton of options available.

We will go over your options to help you make the best decision for you and your home. Let’s get started. 

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How Does Foreclosure Work?

In most states, the foreclosure process begins after the third consecutive missed mortgage payments. Once homeowners are 90 days late, the mortgage servicer sends a notice of default to the homeowners. This is an announcement that the bank is beginning the foreclosure proceedings.

The foreclosure timeline for each state differs, but over the next several weeks or months, the bank will go through the legal process of foreclosure. This is usually done through the court system and may require appearances in court. By the end of the process, the bank has repossessed the house and the homeowners have been evicted. 

Once the house is repossessed, the bank usually auctions the home through a foreclosure sale. If the home doesn’t sell, the bank or lender typically readies the home for the market and sells the home. Once the home is sold, the lender regains at least part of its losses.

How Does Foreclosure Affect Homeowners?

Foreclosures affect you now and in the future. Your late payments, short sale, or foreclosure will be reported to the credit bureaus and remain on your credit report for at least seven years. In the short-term, late payments drag down the homeowners’ credit score. In the long-term, they’ll have to wait years for mortgage lenders to deem them creditworthy for a mortgage. However, there are some opportunities for bad credit home loans.

In addition to issues with their credit, they’ll pay out court costs, legal fees, foreclosure fees, and late fees. Plus, they’ll need to find a new place to live and cover the costs of moving. 

First Steps to Avoid Foreclosure

When you’re faced with possible foreclosure, there are some preliminary moves that will make things easier for you. First, you need to make a budget. Gather your statements, take a look at your income, and be as thorough as possible. 

Next, you need to find where you can make cuts. If things are tough, get rid of cable and other ‘luxury’ items on your budget. Beyond cuts, look where costs can be reduced, like lowering your car insurance payment or sharing your car with a trusted neighbor. 

Once you have a clear idea of what you’re working with, you can bring this information to your lender. Your mortgage company will be more willing to work with you when you can prove that you’re taking matters seriously. 

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Second Step: Contact Your Lender ASAP

It often seems like avoiding the issue is the easiest way, but this is not so when it comes to mortgages. Mortgage lenders do most things automatically, so calling to speak with a person is your best bet. You can’t reason with a computer. 

Explain your situation in detail. Most lenders prefer to work with current homeowners rather than go through the hassle of the foreclosure process. Remember that lenders have to cover court costs, too. 

There may be special programs available through your lender to help you avoid foreclosure.

Third Step: Explore Options for Avoiding Foreclosure

There are several options available to homeowners. The key to deciding which option is right for you depends on your financial picture. The hardest decision is whether or not to keep your house. For some homeowners, a setback is temporary. In other cases, bigger changes have taken place that makes it impossible to keep the home. 

While keeping the home is every homeowner’s preference, know that choosing to sell is okay. Downsizing may hurt emotionally and financially—moving isn’t free. However, if you can choose to sell your home without going through the short sale or foreclosure process you can avoid a lot of headaches. 

So when you’re exploring your options, be sure that you make room for your other financial goals:

  • Retirement savings
  • Education savings
  • Health savings accounts
  • Emergency fund savings

If you find that your home takes up more than half of your income, selling may be a better option. Being able to make that call early—before the foreclosure process starts—gives you the best advantage. 

Okay, that important information said, let’s look at your options: 

Repayment Plan

Because most lenders prefer keeping you in your home rather than going through the foreclosure process, they are often willing to work with you. A repayment plan is a popular way to help homeowners get caught up. 

Typically, a repayment plan adds a small percentage of the cost of your missing payments to your regular monthly payments. This added cost may last anywhere from a few months to two years depending on your lender. 

Just be sure that whatever you agree to works for you because you will be temporarily paying more every month. 

Loan Refinancing

Refinancing a mortgage is a common way for homeowners to get a lower interest rate and a lower monthly payment. Many lenders would prefer refinancing your mortgage rather than going through foreclosure.

But mortgage refinance isn’t free. You’ll need to understand the financial consequences of refinancing and compare it to other options. It may sound like a great idea to lower your payment, but for others, the added costs of refinancing may make the loan too expensive in the long run. 

Additionally, some lenders may recommend refinancing to an interest-only loan or an adjustable-rate mortgage (ARM). These loans can be difficult to manage, however. In both cases, the monthly mortgage payment starts small. However, after a certain amount of time, the costs go up, sometimes dramatically. 

Loan Modification Programs

Loan modification programs might be available to you through federal programs or through your lender. You will need to do some investigation to find out what you qualify for. Loan modification can help you by lowering the monthly mortgage payment and/or extending the payback period of your loan. 

Just remember that any loan modification tacks on a few hundred to a few thousand dollars to your mortgage. This is done through fees, interest charges, and creating a longer timeline for the payoff. The longer you pay your mortgage, the more expensive it will be. 

Forbearance

Some homeowners may be eligible for forbearance. If their current financial setback is temporary, forbearance could be a good fit. Forbearance works by temporarily suspending mortgage payments. Interest still accrues—meaning the balance on the mortgage will increase during this time. 

Most lenders charge a processing fee when homeowners choose forbearance. This fee is usually added to the balance, meaning you’ll be charged interest on the fees. 

Partial Claim

If your mortgage loan is through the Federal Housing Authority (FHA), you may qualify for a small loan to pay for your past-due mortgage payments. This is offered through the Department of Housing and Urban Development (HUD). Eligible homeowners get the added benefit of paying no interest for the loan. 

The loan is paid back either through paying off your mortgage or when you sell the home. 

Selling Your Home: Regular vs Short Sale

If you suffer a financial hardship and you know that it’s likely to last, putting your home on the market right away can be your best bet. You may not be able to get the best price for your home, but you’ll get out with your equity and without damaging your credit. 

However, for homeowners further along in the process, selling normally may not be an option. In this case, a short sale is best. Homeowners can avoid foreclosure and the extra fees associated with it, though short selling can still hurt their credit. 

Beyond the short sale, homeowners may be able to sell the home back to the bank. This is called a deed in lieu of foreclosure, and it can only be done with the cooperation of your lender. Still, this can be a great way to avoid foreclosure and soften the financial setbacks of losing your home. 

Frequently Asked Questions About Avoiding Foreclosure

How long can you not pay your mortgage before foreclosure?

State law varies, but you can not pay your mortgage for three months or 90 days before the foreclosure process begins. After the foreclosure process officially begins, you have a few weeks to a few months depending on state rules. To get out of foreclosure, you’d need to pay for everything past due, plus any fees. 

Can I sell my home after making a loan modification?

Let’s say you’re a few payments behind and you still want to avoid foreclosure. It may be possible for you to modify your loan or work out a new payment plan to get your loan current. Depending on the rules of the program you use, you may be able to sell your home. This can be great if you need some time to get the home ready for the market or want to list your home closer to the peak of home sales. Just be sure to read all your documentation carefully. Some modification programs require you to remain in the home for a year or longer. 

Conclusion: Know Your Options 

You have the best knowledge of your home. You know your financial picture. If you just add to that the knowledge of your options, you will be able to make the right choice. If you decide on forbearance or another option that adds to the cost of your home loan, be sure to know why that decision is better than selling your home. And don’t forget that you can always speak to an independent housing counselor to help you make the best decision. 

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Updated July 24, 2020

J.J. Starr is a financial copywriter and enjoys helping readers find the information they need. In addition to her background in banking and financial advising, she is also a poet with an MFA from New York University. She lives in Amherst, Massachusetts. You can learn more at jjstarrwrites.com.