10 Steps to Avoid Foreclosure

If you fail to make your home mortgage payments, foreclosure may occur. Foreclosure is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe your lender an additional amount. Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future.

  • Don't ignore the problem.
    The further behind you become, the harder it will be to reinstate your loan and the more likely that you will lose your house.
  • Contact your lender as soon as you realize that you have a problem.
    Lenders do not want your house. They have options to help borrowers through difficult financial times.
  • Open and respond to all mail from your lender.
    The first notices you receive will offer good information about foreclosure prevention options that can help you weather financial problems. Later mail may include important notice of pending legal action. Your failure to open the mail will not be an excuse in foreclosure court.
  • Know your mortgage rights.
    Find your loan documents and read them so you know what your lender may do if you can't make your payments. Learn about the foreclosure laws and timeframes by contacting the State Government Housing Office.
  • Understand foreclosure prevention options.
    Valuable information about foreclosure prevention (also called loss mitigation) options can be found on the internet at www.fha.gov/foreclosure/index.cfm.
  • Contact a HUD-approved housing counselor.
    The U.S. Department of Housing and Urban Development (HUD) funds free or very low cost housing counseling nationwide. Housing counselors can help you understand the law and your options, organize your finances and represent you in negotiations with your lender if you need this assistance. Find a HUD-approved housing counselor near you or call (800) 569-4287 or TTY (800) 877-8339.
  • Prioritize your spending.
    Review your finances and see where you can cut spending in order to make your mortgage payment. Look for optional expenses-cable TV, memberships, entertainment-that you can eliminate.
  • Use your assets.
    Do you have assets -- a second car, jewelry, a whole life insurance policy -- that you can sell for cash to help reinstate your loan? Can anyone in your household get an extra job to bring in additional income? Even if these efforts don't significantly increase your available cash or your income, they demonstrate to your lender that you are willing to make sacrifices to keep your home.
  • Avoid foreclosure prevention companies.
    You don't need to pay fees for foreclosure prevention help -- use that money to pay the mortgage instead. Many for-profit companies will contact you promising to negotiate with your lender. While these may be legitimate businesses, they will charge you a hefty fee (often two or three month's mortgage payment) for information and services your lender or a HUD-approved housing counselor will provide free if you contact them.
  • Don't lose your house to foreclosure recovery scams!
    If any firm claims they can stop your foreclosure immediately if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your own home! Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, or a HUD-approved housing counselor.


Why Do Sellers Go Into Foreclosure?

Sellers stop making payments for a host of reasons. Few choose to go into foreclosure voluntarily. It's often an unpredictable result from one of the following:

The recent economic downturn in the U.S. has brought record job loss numbers and plunging real estate values, leaving many homeowners struggling to keep up with their monthly mortgage payments. And with foreclosures on the rise nationwide, it's never been more important for cash-strapped homeowners to understand their options and take action now, to avoid losing their homes to foreclosure

If you are having trouble making your payments, contact your loan servicer to discuss your options, including loan modification as early as you can.

If you are having trouble making your payments, contact your loan servicer to discuss your options as early as you can. Most loan servicers are willing to work with customers they believe are acting in good faith, and those who call them early on. The longer you wait to call, the fewer options you will have. After you've missed three or four payments and your loan is in default, most loan servicers won't accept a partial payment of what you owe. They will start foreclosure unless you can come up with the money to cover all your missed payments, plus any late fees.

If you have fallen behind on your payments, consider discussing the following foreclosure prevention options with your loan servicer:

Reinstatement: You pay the loan servicer the entire past-due amount, plus any late fees or penalties, by a date you both agree to. This option may be appropriate if your problem paying your mortgage is temporary.

Repayment Plan: Your servicer gives you a fixed amount of time to repay the amount you are behind by adding a portion of what is past due to your regular payment. This option may be appropriate if you've missed only a small number of payments.

Forbearance: Your mortgage payments are reduced or suspended for a period you and your servicer agree to. At the end of that time, you resume making your regular payments as well as a lump sum payment or additional partial payments for a number of months to bring the loan current. Forbearance may be an option if your income is reduced temporarily (for example, you are on disability leave from a job, and you expect to go back to your full time position shortly). Forbearance isn't going to help you if you're in a home you can't afford.

Loan Modification: You and your loan servicer agree to permanently change one or more of the terms of the mortgage contract to make your payments more manageable for you. Modifications can include lowering the interest rate, extending the term of the loan, or adding missed payments to the loan balance. A loan modification may be necessary if you are facing a long-term reduction in your income. Before you ask for forbearance or a loan modification, be prepared to show that you are making a good-faith effort to pay your mortgage. For example, if you can show that you've reduced other expenses your loan servicer may be more likely to negotiate with you.

Selling Your Home: Depending on the real estate market in your area, selling your home may provide the funds you need to pay off your current mortgage debt in full.

Bankruptcy: Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy another home, get life insurance, or sometimes, even get a job. Still, it is a legal procedure that can offer a fresh start for people who can't satisfy their debts. If you and your loan servicer cannot agree on a repayment plan or other remedy, you may want to investigate filing Chapter 13 bankruptcy. If you have a regular income, Chapter 13 may allow you to keep property, like a mortgaged house or car that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income toward payment of your debts during a three-to-five-year period, rather than surrender the property. After you have made all the payments under the plan, you receive a discharge of certain debts.

Before you get in touch with your loan servicer to discuss loan modification and other options, you'll need to get the right information together and be prepared.

Before you have any conversation with your loan servicer, prepare. Record your income and expenses, and calculate the equity in your home. To calculate the equity, estimate the market value less the balance of your first and any second mortgage or home equity loan. Then, write down the answers to the following questions:

    • What happened to make you miss your mortgage payments? Do you have any documents to back up your explanation for falling behind? How have you tried to resolve the problem?
    • Is your problem temporary, long-term, or permanent? What changes in your situation do you see in the short term, and in the long term? What other financial issues may be stopping you from getting back on track with your mortgage?
    • What would you like to see happen? Do you want to keep the home? What type of payment arrangement would be feasible for you?


Throughout the foreclosure prevention process:

Reduce Your Mortgage Obligations to Avoid Foreclosure You may be able to stop paying some of your home loans without risking foreclosure. Here's how.

If you're like many homeowners, your home may be encumbered with a second or third mortgage (or deed of trust), and perhaps a home equity loan. If you are having trouble making all your mortgage payments, you may be able to avoid foreclosure if you pay the right loan and either stop paying or make reduced payments on the rest. In almost every case, your first mortgage or deed of trust is the right loan to keep current. Although stopping payment of loans secured by your home is usually a last resort, if you can do so safely (that is, without risk of foreclosure), thereby leaving you with more money to pay the one or two lenders that could foreclose on your house, this strategy could keep you in your home.

Here's how it works.

When you originally took out the loan to buy your home, you agreed to have the loan (or loans) secured by a mortgage or deed of trust. This gives the lender a lien (legal claim) on the property. If you fail to comply with the payment terms of the loan, the lender can enforce its rights by foreclosing on your home. In foreclosure, the lender sells your home in order to recoup the money you owe under the mortgage.

The original loan you used to buy your home is called a "first mortgage." Why first? It's almost always recorded first and gets paid first after a sale. In the same manner, a second loan secured by the home is a second mortgage and is paid second. In addition, many people have other loans against the home, often in the form of a home equity line of credit. As with the first mortgage, the lender's primary remedy for a default on these additional loans is foreclosure.

Who gets what in a foreclosure sale? If the home is sold in foreclosure, the lenders are paid in order of seniority -- the holder of the first mortgage gets paid first, the holder of the second mortgage gets paid second, and so on. If there isn't enough equity in the home to pay off a second or third mortgage, those lenders go unpaid. As a result, those lenders have no incentive to initiate foreclosure proceedings because they would get nothing at the end of the day. Lacking an incentive, a lender is extremely unlikely to bring a foreclosure action even if your state's law technically allows it.