Homeowners who are hoping to stop foreclosure often dread dealing with the facts that got them to this place to begin with. Dealing with those facts can be depressing. If they think back to when they first bought that home, losing the home was probably the furthest thing from their mind. Few homeowners actually plan to go into foreclosure.
- The first course of action is to call your lender and see if it can do something to help you keep from defaulting.
- Lenders might be able to give you time to make up the payments, spread them out, change your loan terms, or have other options for you.
- If your lender files a Notice of Default, you'll only be able to sell the home, use a short sale, or deed the home to the lender.
Reasons for a Pending Foreclosure
Apart from those who knowingly participate in mortgage fraud—with the intention of never making a single payment—most homeowners face sudden extenuating circumstances that force them to stop making timely mortgage payments. Here are a few of those reasons:
- Job loss/unexpected unemployment
- Sudden illness or medical emergency
- Death in the family
- Divorce/loss of a second income
- Excessive debt obligations
- Job demotion or promotion denials
- Inability to pay an adjustable interest rate that increases
- Unexpected major home maintenance expense
- Balloon payments due
Ways to Stop a Foreclosure
The best way to stop a foreclosure in California, for example, is to prevent the filing of a Notice of Default. We mention this state because nearly 40 million people live in California, and in California there is a lot of real estate. Lenders do not want to foreclose but will file a Notice of Default to protect their interests, if necessary.
If you know you are unlikely to meet your mortgage obligation, the first thing you should do is call your lender.
Don't put it off, be embarrassed or ignore letters from your lender because those responses will make the situation worse, not better. Depending on your particular situation and hardship circumstances, there are some loan modification options your lender might propose, including the following:
- Time to make up your payments: Lenders might agree to wait before taking legal action against you and let you work out a repayment plan that is affordable for you. This is called forbearance.
- Forgiving a payment: If you can agree on a way that you will be current after missing a payment or two (without the means to pay it back), the lender might give you a break and waive your obligation. This is called debt forgiveness, and it rarely happens.
- Spread out the missed payments over a longer term: For example, if your payment is, say, $1,200 a month, the lender might let you add $100 a month to each payment for a year until you are caught up. This is called a repayment plan.
- Changing the terms of your loan: If your mortgage is an adjustable loan, the lender might freeze the interest rate before it increases or change the interest rate to a more manageable rate for you. A lender might also extend the amortization period. This is called a note modification.
- Adding the back payments to your loan balance: If you have sufficient equity and meet the lender's lending guidelines, the lender might increase your loan balance to include the back payments and re-amortize the loan. This is called a refinance.
- Offering a separate loan: Certain government loans contain provisions that let borrowers who meet specific criteria apply for another loan, which will pay back the missed payments. This is called a partial claim.
Options After a Notice of Default
When the lender files a Notice of Default, your options are limited. That is why it is better for you to call your lender before falling behind on your payments because lenders are often reluctant to work out repayment schedules after foreclosure proceedings have commenced.
You will be given a certain time period to bring the payments current, pay the costs of filing the foreclosure, and stop the foreclosure. This is called reinstatement of your loan. If you cannot make up the missed payments and the lender will not work with you, here are a few other options to stop foreclosure:
- Sell your home: Interview real estate agents to get an opinion of market value and average DOM to sell your home. You might be tempted to hire a discount broker, but many sellers feel they need the exposure and marketing that full-service brokers offer. Compare both to determine which best meets your needs and time frame.
- Consider a short sale: If your home is worth less than the amount you owe, you might be a candidate for a short sale. A short sale affects credit but it's not as bad as a foreclosure.
You or your agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale. This is called a pre-foreclosure redeemed.
- Sign a deed in lieu of foreclosure: This is called deeding the home back to the lender. The homeowner gives the lender a properly prepared and notarized deed, and the lender forgives the mortgage, effectively canceling the foreclosure action. Lenders tell me that deeds in lieu of foreclosure affect credit the same as a foreclosure.
- Short-term rental: The lender might also work an arrangement where a homeowner can remain in the home until finding a place to move into. Owners in default should negotiate the right to retain occupancy, arguing that if the lender followed through on the foreclosure, an owner would still enjoy the right of possession during that procedure.
- Consider bankruptcy: A legal action such a bankruptcy can stop all foreclosure action. Call a lawyer who specializes in filing for bankruptcy and ask for a thorough explanation of all your options, costs, and the time frame involved. It won't permanently stop a foreclosure action, but it can postpone it.
At the time of writing, Elizabeth Weintraub, Cal BRE #00697006, is a broker-associate at Lyon Real Estate in Sacramento.