Here’s are your main alternatives when you think foreclosure is on the horizon.
If you have enough cash, you can “reinstate” your mortgage by making up all the missed payments plus fees and interest the lender charges you. Your state’s law will probably give you a certain amount of time, after the lender gives you notice that the foreclosure is beginning, in which you have a legal right to reinstate the loan this way. (You can check your state’s rule in our Summary of State Foreclosure Laws.)
For example, in California you have the right to reinstate your loan for three months after the lender mails you a notice of default. After that period ends, if you haven’t negotiated a workout, the lender can and usually does accelerate the loan (notify you that it is declaring the entire amount due immediately) and send you a notice of sale, telling you that the house may be sold in 21 days. Even then, you can reinstate the loan up to five days before to the sale pursuant to state law.
In some other states, the lender may accelerate the loan as soon as you fall behind in your payments, and the law does not give you an opportunity to reinstate. But more and more lenders are not eager to accelerate the loan and push ahead with foreclosure; they would prefer to work something out with you. Additionally, many mortgages and deeds of trust provide a right to reinstate as part of the agreement.
If you have enough money to be considering reinstatement, you can probably also negotiate something with the lender. Keep in mind that most lenders don’t want to foreclose—it’s a hassle for them, especially these days when house prices have fallen and banks don’t want to be saddled with real estate that may be hard to sell.
You should start with a HUD-approved housing counselor and a visit to the Making Home Affordable website. (To find a HUD-approved housing counselor, visit the Department of Housing and Urban Development website and click "Talk to a Housing Counselor" or contact the Homeownership Preservation Foundation at 888-995-4673 or http://www.995hope.org/.) With the assistance of a counselor, you may be able to get:
Even though you can negotiate directly with the servicer, it’s always worth talking to a counselor. Their services are free, and they will help you explore possible remedies and negotiate a workout with your servicer or lender.
You may have even more workout options available to you if your loan is owned, insured, or guaranteed by a government agency such as Freddie Mac, Fannie Mae, the Federal Housing Administration, HUD, the VA, or the Rural Housing Service. In fact, mortgages insured by the VA or the Federal Housing Administration (FHA) do not qualify for modification under the Home Affordable Refinance or Home Affordable Modification programs.
If you can refinance at a better rate and pay off your old loan, you can start fresh. Unfortunately, refinancing is tough these days unless you have equity in your house and the home value curve in your community is trending up rather than down. Of course, if your mortgage is owned or controlled (through securitization) by Fannie Mae or Freddie Mac and you qualify for a refinance under the Home Affordable Refinance Program, your refinancing worries may be over. (See our article on refinancing under the Making Home Affordable program.)
Some states give you the right to “redeem” your mortgage by refinancing up until the time of the foreclosure sale. A few even let you redeem for a certain period of time after the sale. You can find your state’s redemption rules, if any, in our Summary of State Foreclosure Laws.
The ways that Chapter 7 or Chapter 13 bankruptcy can delay or avoid foreclosure are covered in detail in our article on How Bankruptcy Can Help With Foreclosure, but here's a quick summary of the differences between Chapter 7 and Chapter 13 bankruptcy and how each affects foreclosure:
|Chapter 7 or Chapter 13 Bankruptcy: A Quick Comparison|
|Chapter 7||Chapter 13|
|Who qualifies||Anyone whose household income is below the state median OR who passes a “means test”||Anyone who has enough income to propose a reasonable repayment plan|
|Effect on foreclosure||Delayed two to three months||Delayed; possibly avoided|
|What happens to your property||You keep everything that is legally exempt; the rest is sold to repay your creditors||You keep your property, but you must pay your unsecured creditors the value of your nonexempt property|
|What happens to your mortgage||The amount you owe is discharged, but the lien created by the mortgage remains, and you must make payments to avoid foreclosure||Your first mortgage will probably remain intact; second and third mortgages can be eliminated if they are not at least partially secured by the house’s value|
|What happens to your debts||Most debts are wiped out (discharged); some (such as child support and back taxes) survive||You repay a percentage of debt over three to five years, under a repayment plan you propose to the court; if you finish the plan, the rest of the debt is wiped out|
|How long it takes||Three to four months||Three to five years|
|Will you need a lawyer?||Probably not||Usually necessary|
A reverse mortgage is a way to tap into the equity of your home without selling the house. You get money from a lender and generally don’t need to pay it back as long as you live in the house. The loan must be repaid only if you sell your house or, after your death, when the house is sold and the lender is repaid from the proceeds.
You’ll be able to get a reverse mortgage if you have substantial equity and are over age 62. These mortgages are heavily regulated by the Federal Trade Commission and can provide a safe approach to preventing foreclosure and preserving your equity for your own needs.
Reverse mortgages, because they take part or all of your equity, leave less value for you to pass on at your death. Also, it may be harder to obtain a reverse mortgage in a time of decreasing property values because the reverse mortgage lender, like everyone else, will be uncertain about the amount of equity you have in the property.
Finally, even though you don’t have to make payments on the reverse mortgage, you still may be responsible for paying the property taxes, insurance, and maintenance. This means that people on fixed incomes are at risk of losing their homes under a reverse mortgage if they can't afford these costs.
More information about reverse mortgages. Learn more at www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm. Also, see our article Using a Reverse Mortgage to Prevent Foreclosure.
Did your lender fail to follow the steps set out in your state's laws covering the foreclosure process? Or did they violate the terms of your mortgage loan agreement? Then you may be able to delay--or even stop--the foreclosure. More and more bankruptcy judges are requiring foreclosing parties to show documents proving they own the mortgage loan and have the right to foreclose before allowing foreclosures to continue.
Due to the securitization of mortgages that went on at the peak of the real estate market a few years back, foreclosing parties often are unable to produce documents proving ownership to the court reviewing the foreclosure. Another way you may be able to delay or stop your foreclosure is if your lender violated federal fair lending rules or other federal and state laws covering consumer transactions.
Extra protections for service members. If you are on active duty in the military or have been on active duty within the previous year, you can delay the foreclosure lawsuit—and get other help as well.
For some people, it makes economic sense to give up the house and move on. If so, there are several ways to say goodbye to it; you’ll want to choose the method that causes the least financial and emotional upset to you and your family.
If you have only a first mortgage, you may want to simply leave. But you’ll want to do this only if the lender cannot sue you if, after the foreclosure sale, the mortgage still hasn’t been paid off. (If the lender can’t sue you in this situation, you have what is called a non-recourse loan; check your state’s law in our Summary of State Foreclosure Laws to see whether or not the lender can recover a deficiency--the difference between what you owe and what the lender ends up with). If no deficiency judgment is allowed, the lender will foreclose on the property to regain title, but you’ll be cut loose without owing anything to the lender. You might, however, be liable for income tax on the amount the lender comes up short (that amount may be considered income to you because you won’t have to pay it back).
If you have a second or third mortgage, walking away may not get you off the hook for those debts—or, in many cases, for the tax on the amount the lender writes off.
If your lender agrees, you may be able to avoid foreclosure by selling your house for an amount less than your outstanding mortgage loan. This is called a short sale. If you live in a state that allows lenders to sue for a deficiency after a short sale, you should get your lender to release you from repaying the deficiency in writing.
A short sale may be close to impossible if you also have a second or third mortgage on your house. A short sale, by definition, fails to cover your mortgage debts. Your primary lender won't be made whole after the short sale; your second and third mortgage lenders will get close to nothing. All of your lenders need to agree to the terms of the short sale. If a lender refuses to approve the short sale, they will also refuse to release the lien on your home, and no reasonable buyer would want your home with unpaid liens still attached to the title.
Some people prefer short sales to foreclosure (and to bankruptcy) because of the conventional wisdom that a short sale will have a less negative impact on your credit score.
You may be able to get your lender to let you deed the property over so that no foreclosure is necessary; this is called signing a “deed in lieu of foreclosure.” But before you go this route, you’ll want to have an agreement (in writing) that the lender won’t go after you for any deficiency that remains after the house is sold. And once again, this remedy probably won’t be available if there are second or third mortgages. As with short sales, some believe that a deed in lieu of foreclosure will be better for your credit than a foreclosure or bankruptcy.