If the sales price you are offered falls short of the amount you owe the lender -- called a "short sale" -- you need to get permission from your lender. This is because your lender is not required to release its lien on your home unless the mortgage is paid off in full. You'll need to negotiate with your lender to get them to agree to release their lien for less than the amount you owe. No purchaser will want your home unless they get clear title to the property, free of liens from your lenders.
Keep in mind that in most states, technically a lender is allowed to sue you after the house is sold (or foreclosed on) to recover any remaining deficiency -- the difference between the sales price and what you owe on the mortgage. In most cases, however, a lender is not likely to sue for a deficiency. But to be safe, make sure you get in writing from your lender a release from liability for any deficiency. If you live in a state that doesn't allow a lender to sue you for a deficiency, you don't need to get a release from the deficiency in writing.
Short sales usually are more difficult to complete if there is a second mortgage, unless the same lender owns both loans. Also, some homeowners may be better off letting a foreclosure take place, saving a few month's mortgage payments until it happens. For more information on short sales, see Nolo's article Short Sales and Deeds in Lieu of Foreclosure.
Bankruptcy can delay a foreclosure, but won't stop it permanently. Here's how it works: When you file bankruptcy, the court automatically issues an "automatic stay." The automatic stay directs your creditors to cease all collection activities and foreclosures immediately. If your home is scheduled for a foreclosure sale, the sale will be postponed while the bankruptcy is pending -- typically for three to four months.
However, if your lender obtains the bankruptcy court's permission to proceed with the sale (by filing a "motion to lift the stay"), the sale may be allowed to go forward after a couple of months. But during a Chapter 7 bankruptcy, you can live in your home for free for several months while your bankruptcy is pending. You can then use that money to help secure new shelter. For more information, see Nolo's article How Bankruptcy Can Help With Foreclosure.
If you're having trouble making your mortgage payments or already in jeopardy of foreclosure, see Nolo's Bankruptcy and Foreclosure Blog or the bestselling Foreclosure Survival Guide, now available online at no charge. Both are written by attorney Stephen R. Elias, president of the National Bankruptcy Law Project.
With a deed in lieu of foreclosure, you give your home to the lender (the "deed"), and in exchange, the lender cancels the loan rather than foreclosing on the property. In most states, a lender is allowed to sue you to recover any remaining deficiency--the difference between what the lender can sell the house for and what you owed on the mortgage. Before you agree to a deed in lieu of foreclosure, make sure that the lender agrees, in writing, to forgive any deficiency that exists. Deeds in lieu of foreclosure are not possible if there is a second mortgage, unless the same lender owns both loans. For more information, see Nolo's article Short Sales and Deeds in Lieu of Foreclosure.
Before May 20, 2009, most renters lost their leases upon foreclosure. The rule in most states was that if the mortgage was recorded before the lease was signed, the lease would be wiped out when a foreclosure occurred. Tenants would then become month-to-month renters whose tenancy could be terminated with proper notice (usually 30 days, but 60 days in California).
On May 20, 2009, President Obama signed the Protecting Tenants at Foreclosure Act of 2009. Under this new federal law, leases aren't automatically terminated by a foreclosure. Instead, tenants have the right to stay until the end of their lease term, and month-to-month tenants must receive a 90-day notice before having to move out. One exception: if the new owner intends to occupy the foreclosed home (in other words, the new owner isn't the lender or an investor), the lease may be terminated with 90 days' notice.
The Protecting Tenants at Foreclosure Act of 2009 is currently set to expire on December 31, 2014. For more information on tenants' rights in foreclosure, see Nolo's article Renters in Foreclosure: What Are Their Rights?
Under certain circumstances, a mortgage lender can't foreclose on a house owned by military personnel on active duty unless the lender seeks special permission from the court. For more information, see Nolo's article Legal Protections for America's Military: The Servicemembers' Civil Relief Act.
Your lender may modify your loan if you have an adjustable rate mortgage or if you are several months behind on your mortgage. Call and ask to speak to your lender's loan modification or loss mitigation department. The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to modify the terms of your loan.
If your lender doesn't want to work with you, contact a HUD-approved housing counselor for help negotiating with your lender. HUD-approved housing counselors work for free and are well-versed in the various foreclosure-prevention programs that are available. To find a counselor, contact the Homeownership Preservation Foundation at www.995hope.org or 888-995-HOPE (888-995-4673).
There are several plans offered by the federal government to help homeowners avoid foreclosures as part of the Making Home Affordable program. The two biggies are the Home Affordable Refinance Program (HARP), under which you may be able to refinance your current mortgage into a 15- or 30-year fixed-rate mortgage, and the Home Affordable Modification Program (HAMP), which may allow you to lower your monthly payment on your first mortgage to 31% of your gross income.