How can I avoid foreclosure?
Despite what financial experts have been saying for years, many average Americans are finding it difficult to maintain employment and pay for their basic needs, including their home. The good news is that even if you have received a foreclosure notice, it does not mean that you will lose your home. In fact, most homeowners have much more control over the foreclosure process than they believe.
Missed a mortgage payment – what now?
Controlling the outcome of the home foreclosure process will require that you to take the right steps at the right time. If you have missed a mortgage payment, which means your payment is not simply five to 10 days late but more than 30 days late, you will receive a notice of default (NOD) from the lender.
NOD statements differ, but the general gist of all of them is that you are in default, you have not fulfilled the contractual obligations of your mortgage, and you have a certain number of days to pay the default or the bank will initiate foreclosure proceedings. If you do not contact the lender and you fail to pay what you currently owe, plus fees and applicable interest, the bank has the legal right to sell your home at auction.
How long do you have until the auction? State requirements differ, so the amount of missed payments that you can have without getting a demand letter or having the foreclosure process start can vary. For example, in California, it takes up to 120 days on average for a home to reach the foreclosure auction.
How do I stop a home foreclosure?
If you have received the notice of default from the lender, it is time to take action. Let’s look at several strategies to help you save your home.
- Talk to your lender about a repayment plan
Lenders do not want to repossess your property. They would much prefer that you meet the payment obligations outlined in your contract. The first option if you have missed several mortgage payments is to call your lender and ask if you can create a repayment plan.
Under a repayment agreement, the lender would expect you to repay missed mortgage payments and continue making timely mortgage payments going forward. For example, if you have not paid your mortgage for three months and you owe $3,000, you would agree to pay a little extra each month over the next year until the amount owed was paid in full.
- Investigate a short sale
If you have received the NOD but the lender has not scheduled your home to be sold at auction, you may be able to sell your home to another buyer through a short sale. Lenders may consider this option because they can save time and effort and can avoid having to auction the property.
A short sale is not the best option for all homeowners. Unfortunately, a short sale may not save your credit score; it may not eliminate the right of the lender to collect a deficiency judgment on the property even after it is sold (laws vary by state); and if the lender does forgive the deficiency judgment, you may still owe taxes on the forgiven debt.
- Investigate a deed in lieu of foreclosure
Another option to avoid foreclosure is to pursue a deed in lieu of foreclosure. Under this agreement, the homeowner voluntarily transfers ownership of the home to the lender. If you qualify for a deed in lieu of foreclosure through the federal government's Home Affordable Foreclosure Alternatives program or another similar program, you can avoid a foreclosure sale and you may be released from your obligation to repay your remaining mortgage balance.
Experts warn, however, that there are certain risks with a deed in lieu of foreclosure. For example, some homeowners will have to pay the deficiency balance, and they may owe taxes if the deficiency is forgiven.
What will bankruptcy do for me?
Bankruptcy will immediately stop the foreclosure process and may save your home, but there are no guarantees. In fact, with bankruptcy, all you can be sure of is that you will have more time to investigate your options.
For example, if you decide to file Chapter 7 bankruptcy, your home may be protected from liquidation through your state's bankruptcy exemption laws. In some states, however, the bankruptcy homestead exemption will not be sufficient to protect your home, and your home could be sold to repay your lender.
In some cases, filing Chapter 13 may be a better option to protect your home. Chapter 13 bankruptcy will allow you to create a three or five-year debt repayment plan to repay your creditors. However, if you fail to pay your current mortgage payments or meet the obligations of the debt repayment plan, you can still lose your home despite filing bankruptcy.
Note: Filing bankruptcy will not discharge any secured debt. Mortgage payments and mortgage arrears will not be discharged.