The first thing you need to do is have some basic information about the foreclosure process, your loan, and a basic plan of attack.
- Know the foreclosure process. First off, we should look at the Foreclosure Process Itself. You should read our article about understanding the foreclosure process so you know what happens when you miss the first payment till the actual end of the process when the eviction notice is posted on your home.
- Know your mortgage type. Make sure you completely understand what type of mortgage you currently have. This is important because it can determine what options you can pursue (and what you should pursue) if you want to save your home.
- Communicate with your lender. You should be actively communicating with your lender at all times. Keeping an open dialog is the first thing you should be doing if you want to keep your home. Remember, your lender want you to keep your mortgage – it’s costly for them to foreclose on your home. If you can’t make payments or have difficulty, ask your lender what mortgage assistance programs are available to you!
- Mortgage Assistance Programs. Look at all Mortgage Assistance Programs out there, from government (federal and state) to private organizations who offer assistance. You should consult a processional who specializes in mortgages who can likely put you on the right track on what your options are. However, you should have a clear idea what’s out there FIRST on your own before consulting an expert. Read our Mortgage Assistance Guide which covers these programs in detail.
- Contact a credit counselling agency. There are a number of free credit counselling agencies who advise homeowners who need assistance. The help offered can range from information to actual services like loan modification and mediation. If you are looking for a FREE service, the best place to start is by contacting your local Community Action Agency (CAA) for a referral.
- Walk Away from your Home. If you determine you can’t keep making payments and have exhausted all assistance options, consider a Deed in Lieu of Foreclosure. By walking away from your home, you will often walk away with your credit history intact. Consider this carefully.
- File Bankruptcy. Another option to consider is to file Bankruptcy. Bankruptcy has far-reaching consequences, so you need to think long and hard if this is the right option. However, it’s a legal process and in certain situations where you simply cannot pay down a debt, is the best way to move forward. There are two types of Bankruptcy filings: Chapter 7 or Chapter 13. Both will halt the foreclosure process itself, so you can file a bankruptcy to slow the foreclosure process while your case in being reviewing. It’s not a solution but it can be a stop gap solution while you try to figure stuff out. Chapter 7 Bankruptcy is temporary and will at most give you a bit more time to come up with payments. Chapter 13, however, is a more sustained plan of attack and ca give you up to 5 years of breathing space – you still much make payments as deemed by the court as well as regular mortgage payments, so you will still need an income source – but it’s a means of keeping your home.
- Consider using a lawyer to handle your foreclosure. It’s possible that with a few legal filings, you can in fact halt the foreclosure process for a significant amount of time. You must be LIVING in your home during this entire process, but it’s not unheard of with a lawyer disputing your foreclosure by filing documents, you can extend the time till eviction but months to even a couple years!
- Stay in your home during foreclosure to delay the process and also force unwilling lender to allow loan modification See how to do it here.
If you are having problems with keeping up with your mortgage, you are delinquent on your payments, or you are facing or currently in foreclosure, here are some of your main options.
Keep in mind that while these sound complicated, if you seek out some sort of Foreclosure Mediation service (which if you are facing mortgage difficulty may in fact be available to you for FREE as part of a government mortgage assistance program), the people working on your behalf will figure the best option for you and negotiate it with your lender. This is a highly detailed and specialized field of law — so keep in mind that you will likely need to commission Foreclosure Mediation rather than a Do It Yourself.
How to Get Free Foreclosure Mediation?
This will vary from state to state, but you’ll want a HUD (Housing and Urban Development) approved counseling agency. The good news is that your state likely has a free or low cost counselling agency available to you under the federally-backed Community Action Agency (CAA) network.
So search your state Community Action Agency (do a search online) to locate an home loan counseling agency that will look at your Foreclosure case and perhaps start a mediation on it if you qualify.
You Can Make the Current Mortgage Payments…You Just Need Time
If you have an income source or predict you will have an income and can eventually make payments, these are your best options to keep your house.
You can bring your default back into the green by making a lump payment by a certain date. If your house is headed to foreclosure, you have this option right for most of the process IF you can come up with a lump sum of your missed payments.
Your lender can agree to waive or reduce mortgage payments, temporarily. Additionally, your lender may be able to provide additional help resources. This is a good option if you don’t have the funds right now but you will be getting them in the short future though some means (an upcoming job, income tax refund, etc.).
Your lender may come up with a plan for repayment that enables you to keep up with payments. This could be the continuation of your regular payments plus a small portion of your missed payments each month until you have completely caught up.
You Can’t Make the Current Payments for the foreseeable future
If you’ve suffered a financial setback (loss of job, drop in income, additional expenses affecting your ability to make payments) then you need to look at more long term solutions between you and your lender. This requires an open dialog with your lender and you have to be honest about your financial standing so they can come up with the best way for you to make payments.
Mortgage Loan Modification
This is likely the first step you should undertake to keep your home out of foreclosure and probably the first step. Basically, your lender will renegotiate the terms of your loan to bring down the payment amount. Some of the solutions are:
- Extending loan repayment date to make monthly payments smaller (i.e. moving from 20 year mortgage to 25 year mortgage etc)
- Changing interest rate (i.e. moving from floating to fixed rate or vice versa)
- Adding missed payments to total loan amount (Extension Agreement)
If your financial situation prevents you from keeping up with loan payments, a loan modification can lower your payments so you can continue to make home payments. Keep in mind you are NOT getting a brand new loan but rather just changing the terms of your existing loan. Your credit history and such won’t be affected by this.
The exact modification of your mortgage loan will depend on your specific situation (type of loan, your financial status, your job status, the type of loan, the lender, whether the loan modification is part of a government assistance program, etc), but generally loan modification can include one or more of the following:
- Reduced monthly payments
- Waved fees
- Lower interest rates
- Decreased principal
- Extension of payment length for lower short term payments
How to get Loan Modification: You can either directly negotiate with the lender or have your loan mediated by a third party who is an expert in this field (recommended). There are in fact a number of government-backed programs that will get you a loan modification with your lender if you are struggling with payments. We don’t recommend you contact your lender directly, but seek out third party help to get the BEST deal.
There are several government initiatives you might look at:
Mortgage Principal Reduction
Basically the lender will ‘forgive’ or defer part of the Principal on the total home loan amount. By lowering the principal amount, payment amounts per month are reduced.
Principal reduction makes a lot of sense where the value of the mortgage is HIGHER than the value of the house (say in areas where property value has tanked). In these situations, it’s better for the homeowner to default on the mortgage than actually pay it. Principal reduction lowers the mortgage to the actual estimated value of the house. This can result in huge savings for the homeowner on monthly mortgage payments to the tune of hundreds of dollars per month.
There are basically two types: principal forgiveness or principal reduction. If a bank forgives part of the principal, the overall total loan amount is reduced. If it’s deferred, the principal amount is reduce for a period of time but the borrower will need to repay it at a future date. There are different types of deferrals as well with some deferring the principal permanently IF the house sale is less than the mortgage.
So why would banks offer this? Well a lot of research has been done the past few years since the housing crisis and the research has shown that homeowners are more likely to continue to make payments on a home if the principal is reduced.
This could be because
1) reducing the amount owed for a loan also gives the home owner more incentive to make payments because they owe less
2) lower principal means lower monthly payments
3) reduces the overall number of foreclosures, which prove to actually cost the bank more than lowering principals on home loans
In cases where the home loan is GREATER than the value of the actual home, principal reduction makes a lot of sense.
How to get mortgage Principal reduction: You will have to contact your bank directly or seek out a professional who specializes in this. There may be government mortgage assistance programs that will mediate this as an option for you keeping your house. Keep in mind that to qualify, you usually need to be in exceptional financial circumstances (you’ve lost your job or your job income has dropped) and your property value has dropped significantly since you’ve first taken out the original mortgage.
Short Pay Refinance
Another loan option homeowners can look at to reduce payments. What happens is the loan is refinanced with a DIFFERENT lender than the original lender with better loan terms. The home (unlike with say the Short Sale option) is not sold so the homeowner keeps the home.
This is different than Loan Modification, which redefines the loan terms with the same lender. It’s also not the same as the Short Sale option in which the home is SOLD.
The idea here is that the new lender will offer better loan terms or provide some sort of mortgage assistance. Think of it as a loan modification by refining with a different lender(the new lender ‘buys’ the loan from the old lender). This could be through lower monthly payments or a reduced principal amount.
Who Should Apply for Short Pay Refinance: The Short Pay Refinance is ideal for homeowners who still have an income source and decent credit history. This is not an option for homeowners who cannot make payments on the mortgage. You are still expected to make payments every month.
The last line of defense in your defense against foreclosure. A short sale is when the lender accepts a sale amount for your house less than the current value of the mortgage. Basically, the lender agrees to eat a loss on them mortgage in exchange for a sale on the house to keep it out of foreclosure. The reason? Foreclosure could end up being more costly to the lender. In both foreclosure and short sales, the lender will eat a loss, but with foreclosure the lender takes ownership of the home and has to spend on maintaining and reselling the home, not to mention dealing with the whole foreclosure process itself. A short sale is often a more attractive alternative.
For the homeowner, a Short Sale may walk out of the process with a better credit rating than going through a foreclosure, which can be highly damaging to credit scores (your credit history will stuff take a hit though).
An alternative to the Short Sale is Short Sale Refinancing which is basically when you refinance the mortgage with a different lender who assumes the debt; the terms are often more favorable and the homeowner keeps his or her home.
Who should seek Short Sale? Homeowners who have exhausted all options for keeping a mortgage going and live in an area where there is an active buyer’s market.
Deed in Lieu of Foreclosure
If you have to foreclose on your home, you might consider a Deed in Lieu of Foreclosure filing. This is basically where you simply sign over the deed to your home to the lender. The advantage of this is that the home does not go through the foreclosure process and your lender may release you from all obligations on your mortgage. This can be significant especially if the value of the home is less than the mortgage.
You also avoid the public stress of having your house foreclosed (it would all be done behind the scenes without having the entire neighborhood being notified of your financial status with foreclosure signs etc. being posted to your property).
Another major incentive for the homeowner to pursue this option is that the impact to your credit rating is much less than if you go through a straight foreclosure. It’s even possible to directly negotiate with the lender to avoid putting a Deed in Lieu of Foreclosure on your credit report, which means your credit score won’t be impacted at all, provided you’ve keep up with all other payments during your home ownership.
Who should opt for a Deed in Lieu of Foreclosure? Homeowners who has exhausted all options for avoiding foreclosure and who are willing to walk away from their home with their credit rating intact.
Mortgage Assistance Programs
Your lender may have specific assistance programs in place you can apply for. This are special programs that may forestall foreclosure or give you more temporary breathing room from mortgage payments. But you must ask your lender as the programs can vary between lenders (or not exist at all).
Mortgage Loan Mediation
It’s possible to have a third party mediate your mortgage situation. Ask your lender about this. Typically, Mediation will involve third parties working out the details for you and negotiating with your lender for a new set of terms. You can contact an agency or lawyer who specializes on foreclosure yourself. However, we suggest you look at your state’s Community Action Agency (CAA) for a counselor service that can handle your case for free (if you qualify for the assistance).
Time to Refinance
Usually occurs from the result of loan mediation. Foreclosure is postponed while you are given enough time to refinance your loan agreement to a more favourable set of terms (so you can make payments). You will typically only be granted a Time to Refinance if you stand a good chance of getting a refinance approved.
A special agreement between bank and borrower where the borrower pays part of the delinquency fees with the rest of the unpaid payments tacked onto the total loan amount. This allows the homeowner to ‘catch up’ on payments.
Loan Guarantee Partial Claim
An interesting option in which your mortgage loan guarantor will provide an interest free loan to help bring your loan payments into the green. You are basically using an interest free loan to pay down your mortgage for a set period of time (months to a couple years, pending). This can give you breathing room to sort out your financial situation. When the term ends, you begin paying back your interest free loan.
This is information but make sure you do seek out proper legal counsel. There is free council available if you are in need of it.
The last resort, but it should be an option. Make sure you read up about the foreclosure process and your options should you proceed with it. It’s also possible to delay the foreclosure process substantially by staying in your home during after foreclosure AND by filing motions to challenge the foreclosure process.