How to Avoid Foreclosure | Mortgages and Advice

A recent job loss or unexpected medical bill can cause you to fall behind on your mortgage payments. If you fall too far behind, your lender may start foreclosure proceedings, meaning you could lose your home.

Going through foreclosure is stressful and can negatively impact your credit score for up to seven years. Fortunately, there are steps you can take to avoid foreclosure, and ways to stop the foreclosure process once it starts.

Foreclosure is the process through which a lender repossesses your property because you’ve failed to make mortgage payments. Foreclosure can also be initiated by a homeowners association if you fall behind on annual dues, or a governmental entity if you fail to pay your taxes.

Lenders typically begin the foreclosure process about three to six months after you miss your first mortgage payment, though it can vary based on where you live. It’s a good idea to learn more about the foreclosure laws and processes in your state.

According to Richard F. Kruse, a real estate agent and managing partner of Gryphon USA, there is a wide range of foreclosure timelines depending on your location and your personal situation. He says the process could take five to six months from start to finish in some places, or as long as 12 to 18 months in others.

“Timelines also vary if there is actual pushback to the foreclosure complaint,” Kruse says. “The foreclosure is a civil lawsuit and can be contested by a borrower.”

If you’ve missed one or two payments, you still have time to avoid foreclosure, but it’s important to take action before you fall farther behind. Here are five steps to avoid foreclosure.

The first step is to get a handle on your mortgage payments. Create a budget and see where you can cut your spending to make your mortgage payments more affordable. Cut out discretionary spending like entertainment or eating out, and see if there are other expenses you can deprioritize or delay.

If you’ve missed payments, Kruse recommends contacting your lender immediately. “If you simply can’t make a payment, reach out to the lender and be honest with them,” he says. “Ask what your options are. Lenders would prefer not to foreclose, but with no communication or loan payment, they have no choice.”

As soon as you miss a payment, contact your mortgage servicer and explain that you’re experiencing financial hardship. Once you explain the situation, your lender can tell you how to avoid foreclosure.

If you’re not too far behind on your payments, you may qualify for a repayment plan. This option allows you to catch up on your missed payments without paying a lump-sum amount. You’ll work with your loan servicer to determine the repayment terms and monthly payments.

The U.S. Department of Housing and Urban Development offers free and low-cost housing counseling across the country. A housing counselor will explain your options, help you come up with a financial plan, and represent you in negotiations with your lender. You can contact HUD to find a participating housing counseling agency near you. Make sure you speak to a reputable housing counselor and don’t fall prey to scam artists trying to exploit your situation. You should never have to pay for assistance to avoid foreclosure – help is always available for free through HUD or your lender.

If you can get a lower interest rate or extend your repayment term, refinancing could make your mortgage payments more affordable. However, applying for a refinance is best before you’ve missed any payments. Once you’ve missed several payments, your lender may deny your request to refinance the loan.

Once you’re more than three months behind on your mortgage payments, your lender will likely send you a notice of default. This stage is called pre-foreclosure, and you still have time to work with your lender to stop the foreclosure process. But once you reach pre-foreclosure, drastic action is needed.

Forbearance allows you to suspend or reduce your monthly mortgage payments until you’re in a better place financially. It doesn’t eliminate the amount you owe on your mortgage, and you’ll have to repay any missed payments once the forbearance period ends.

If you think you need a forbearance agreement, contact your lender immediately to see what your options are. Make sure you understand how long the forbearance period will last, how interest will be applied and how you’ll repay the missed payments.

A loan modification involves changes to your loan agreement that could reduce your monthly payments. For example, a modification may involve extending your loan term, reducing your interest rate or reducing the principal balance.

If you’re offered a loan modification, make sure you understand how it will change the amount you’ll owe over the life of the loan. And make sure you can afford the new monthly payments or you could end up losing your home anyway.

A deed-in-lieu of foreclosure involves voluntarily giving the lender ownership of your home to avoid foreclosure. Taking this step can help you avoid paying the remaining balance due on the mortgage. However, this largely depends on your lender’s rules and the state you live in.

If you live in a state that requires borrowers to repay the difference, you can ask your lender to waive the deficiency. If your lender agrees, make sure you have a copy of the agreement in writing before agreeing to a deed-in-lieu of foreclosure.

According to Matt Dunbar, senior vice president of the southeast region at Churchill Mortgage, “A deed-in-lieu of foreclosure should be considered by borrowers facing long-term financial challenges that make mortgage payments unsustainable, particularly when there is little hope for financial improvement.”

You may want to consider a deed-in-lieu of foreclosure if the property is worth less than you currently owe on it or if you’ve been unable to sell the home. “A deed-in-lieu can be a more favorable alternative to full foreclosure, typically having a lesser impact on the borrower’s credit score and providing more privacy,” Dunbar adds.

You may be able to sell your home before the foreclosure proceedings are complete. You can sell your home in a normal real estate transaction, or you can opt for a short sale. If you explore this process before the foreclosure proceedings begin, you may be able to find a buyer who will offer you a good price.

If the foreclosure process has already started, you may want to opt for a short sale, which involves selling your home for less than what you owe on the mortgage. However, your lender has to agree to the short sale first since it could end up absorbing the loss. Your lender also could choose to hold you monetarily responsible for any losses once the short sale is complete.

If you’re facing foreclosure, the best thing you can do is act quickly. Foreclosure proceedings are expensive, so finding alternative options can save you money.