Every year, thousands of Americans face the frightening prospect of losing their homes to foreclosure. And many homeowners enter the foreclosure process not knowing what steps they can take to avoid the stressful scenario.
Use our guide to help you stay in your home. You’ll better understand foreclosures and how they work and – most importantly – learn how to avoid foreclosure.
How Foreclosure Works
A foreclosure occurs when a homeowner can’t make their monthly mortgage payments and their lender repossesses the property and sells it to recover the outstanding balance on the mortgage. If you make a late payment or miss one or two payments, you will be notified and face fines – but you won’t face foreclosure right away.
If you can’t catch up on your late or missed payments within the time period set by the state where the property is located, the foreclosure process will likely begin.
When foreclosure begins, you forfeit your rights to the property, triggering the sale of the property at auction. If the home doesn’t sell at auction, the lender can sell the property on the open market.
The Foreclosure Process
Stage 1: Missed payments
In the vast majority of cases, there are five stages to foreclosure. It typically begins with missed payments. Your lender will reach out to you about your missed payment and inform you of the risk of losing your home. If you miss another payment or fail to renegotiate your payment plan with your lender, it will kick-start the next stage of the foreclosure process.
Stage 2: Public notice
It usually takes 3 to 6 months of missed payments before your lender initiates a foreclosure. Your lender will record and file a notice of default (a public record that you’ve defaulted on your mortgage loan) with the county recorder’s office.
Stage 3: Preforeclosure
Preforeclosure can last anywhere from 1 to 4 months, and during this time you may be able to avoid foreclosure.
At this point, you essentially have two options: you can do a short sale (your lender agrees to let you sell your home for less than what you owe on the mortgage), or you can pay off your outstanding debt as soon as possible. If neither of these options is possible, the foreclosure process will move to the next stage.
Stage 4: Auction
The fourth stage of foreclosure occurs when the lender puts the property up for sale at auction. Depending on the state, you may still have a chance to pay your outstanding debt as long as the auction hasn’t officially begun.
At the auction, a buyer can purchase the property with cash. If the lender doesn’t receive acceptable offers at auction, they can take ownership of the property.
Stage 5: Post-Foreclosure
The fifth and final stage is post-foreclosure, which happens once the lender has taken possession of the home. Because lenders typically want to resell the house as quickly as possible, you may see a foreclosed house back on the market just a few days after an auction.
How Long Does a Foreclosure Stay on Your Credit Report?
Foreclosures can be damaging beyond the loss of your home. A foreclosure can dramatically lower your credit score and stay on your credit report for 7 years (from the date of the first missed payment). Getting another mortgage or loan will be extremely difficult while the foreclosure remains on your credit history.
Tips To Stop Foreclosure Before It Happens
Given the destruction foreclosure can inflict on your personal and financial life, it should go without saying that you should try to avoid foreclosure at all costs. If you are struggling to make your monthly mortgage payments on time, be proactive. Look for options that won’t hurt your credit or force you to look for a new home.
We have some strategies to help you stop foreclosure before it starts:
- Review your budget: The obvious way to keep foreclosure at bay is to make your monthly payments on time and in full. But for many of us, that’s easier said than done. If you think you might fall behind, look at your budget and make any necessary adjustments that allow you to continue making your mortgage payments on time.
- Contact the lender: Lenders dislike foreclosures, too. The process can be long, complicated and costly, and they may not fully recover the loan’s remaining balance. Rather than hoping the issue will go away on its own, contact your lender. If you are anxious about your ability to pay on time, talk to your lender about renegotiating your payment terms or delaying your next payment.
- Learn your mortgage rights: Many homeowners don’t know their rights. Comb over your mortgage documents to see if you can use a clause in your mortgage agreement to your advantage.
- Sell additional assets: If you need cash quickly, consider selling assets you’re willing to part with (think: jewelry, clothes, art, etc.) to make your mortgage payment and avoid foreclosure.
8 Options When You’re Facing Foreclosure
If you’re facing foreclosure right now, you’re likely looking for strategies to cut the foreclosure process short. We’ve outlined eight of them.
If you have enough cash on hand, you can pursue mortgage reinstatement. Reinstatement allows you to pay off your past-due payments (including penalty fees) to put your mortgage back in good standing. The window to reinstate your mortgage will vary by state.
Work out a repayment plan with your lender
We cannot overstate how important it is to reach out to your lender ASAP. In fact, you should be talking to your lender before you miss any payments to let them know you are having trouble keeping up with your existing payment schedule.
Most lenders will negotiate a repayment plan that makes it easier for you to make payments. If you’ve already missed one or more payments, your lender will take the amount you owe in missed payments and add it incrementally to your future payments, giving you more time to pay back your debt without needing to make a large upfront payment.
Apply for a loan modification
Loan modification allows you to negotiate new loan terms with your lender, including lower monthly payments or interest rates. One of the most common strategies is to lengthen your mortgage amortization schedule to give you more time to pay off your loan. Extending your loan term can lower your monthly payments, but it will likely increase the amount you pay in interest.
Request a forbearance
A mortgage forbearance allows you to temporarily lower or pause your monthly mortgage payments, giving you extra time to save money. Once the forbearance period is over, you will pay for the suspended or reduced monthly mortgage payments, including any accrued interest, and your lender will negotiate new payment terms based on your remaining balance.
Speak with a HUD-approved housing agency
A HUD-approved housing counseling agency can advise you on how to avoid foreclosure or help you navigate the foreclosure process for little to no cost.
File for bankruptcy
Filing for bankruptcy isn’t something you should take lightly because it can have many far-reaching financial consequences. And filing for bankruptcy may not prevent foreclosure. It may only delay the process.
Foreclosure Alternatives for Government-Backed Mortgages
There are a few options available if your mortgage is guaranteed, financed or insured by any of the following agencies:
- Federal Housing Administration (FHA): With an FHA loan, you can sell your home during the preforeclosure stage. The debt is considered satisfied even if the proceeds from the sale doesn’t cover the unpaid loan amount.
- Department of Veterans Affairs (VA): You can get help from a VA counselor or VA loan technician to help avoid foreclosure. They can offer invaluable advice on the best financial path for your situation.
- U.S. Department of Agriculture (USDA): The most common strategies to avoid foreclosure with a USDA loan are loan modifications and repayment agreements. You can negotiate these terms directly with the USDA.
What To Do if Foreclosure Is Unavoidable
In some cases, you may not be able to avoid foreclosure. If you’re in that position, it might make more sense to cut your losses. Here are a few pathways to navigating a foreclosure:
With a short sale, your lender agrees to let you sell your home for less than the amount you owe.
Deed in lieu of foreclosure
As the name implies, a deed in lieu of foreclosure requires you to hand over your property deed to the lender to avoid foreclosure. With a deed in lieu of foreclosure, your credit won’t suffer as much damage as it would with foreclosure. Plus, a deed in lieu of foreclosure stays on your credit report for 4 years, while a foreclosure stays on your credit report for 7 years.
Watch Out for Foreclosure Rescue Scams
Scammers often prey on people in desperate financial situations, and foreclosures are no exception. Be wary of companies that promise to get you out of foreclosure. Many scam agencies pretend to be legitimate housing counselors, only to charge you for services and provide virtually no help. Look for agencies and counselors approved by the Department of Housing and Urban Development (HUD).
It’s Not Over Yet: You’ve Got Choices
A foreclosure isn’t a foregone conclusion. There are programs and strategies in place to help you stay in your home.
While you should do everything in your power to avoid late or missed payments, give yourself a second chance by reaching out to your lender ASAP and considering different loan repayment options that can help keep your roof over your head.