Millions of Americans have lost their homes to foreclosure in the last few years. If you're having trouble paying your mortgage, learn about the steps you can take to avoid foreclosure or to minimize your debt after it happens. Quick action is the key to success -- it can save your home and/or help protect your credit rating.
Don't give up and let the lender foreclose on your home without considering your options. A foreclosure will hurt your credit rating and make it difficult to buy another home anytime soon. In addition, if the profits from selling your home don't cover the unpaid portion of your loan, your lender might sue you for the rest.
Your best options if you're having trouble making mortgage payments include:
These options are described in more detail below.
Beware of scam artists. People facing foreclosure are often preyed upon by others claiming they'll help. Some homeowners have unwittingly signed documents giving these scammers title to their property, thus turning themselves into renters. Don't sign anything without getting a professional opinion first.
As soon as you realize you'll have trouble paying your mortgage—ideally, before you've missed any payments—contact your lender or mortgage servicer (the company you send your monthly payments to). Lenders have an incentive to work out an alternative to foreclosure with home loan borrowers, if only to reduce the number of foreclosures they're dealing with.
Do it sooner rather than later. If you call soon, you may be able to work out a solution with your lender. It's easier to get caught up or work out another solution if you haven't fallen too far behind in payments.
Possible solutions. 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 redo the terms of your loan.
What to say when you contact your lender. Here's what you should ask for, in lender-language. (You'll probably need to get to the right department first—it may have a name like "loss mitigation.")
Through the U.S. government's Making Home Affordable program, you may be able to refinance your loan.
The Home Affordable Refinance Program. The Home Affordable Refinance Program, or HARP, was created to help homeowners who are current on their mortgage payments but expect to have difficulty paying their mortgages in the near future, and whose loans are owned by Freddie Mac or Fannie Mae. Under HARP, distressed borrowers may be able to refinance their mortgages into a fixed-rate, low-interest loan. HARP is scheduled to end on December 31, 2018. For more information, see the website for HARP.
For more information on HARP, see our article on refinancing your mortgage under the Making Home Affordable program.
Filing for bankruptcy may help you keep your home or, at least, get you out from under your mortgage. When you file, the foreclosure process is legally stopped (called an "automatic stay"). It can't be reopened until your bankruptcy case closes or the lender gets court permission to proceed (called "lifting the stay"). For more information, see How Bankruptcy Can Help With Foreclosure.
If you simply can't afford the house you own, the above options won't help. You will probably lose your home. But don't wait for your lender to make the first move. If your home has appreciated in value since you bought it, you may be able to sell it yourself. (In fact, real estate investors may show up on your doorstep hoping for a bargain.) Again, contact your lender, who may let you stop making payments until the house is sold.
Ideally, the proceeds from the sale will cover your mortgage and selling costs. But, if they won't, ask your lender to consider accepting what's called a "short sale." That means that the lender accepts the sale proceeds even if they're less than the amount you owe. One issue with short sales is that some lenders will keep trying to come after you for the remainder of what you owe. Contact an experienced real estate agent or attorney before proceeding with a short sale.
If no one is interested in buying your house, your lender may agree to take the deed and cancel your debt. This is called a deed in lieu of foreclosure. The idea is that the bank can then sell your house (as with an actual foreclosure) but won't report it as a foreclosure to the credit rating agencies -- in fact, you can negotiate with the bank about how it can help you better preserve your credit rating. (To learn more about this option, read Short Sales and Deeds in Lieu of Foreclosure.)
For more detailed information on how bankruptcy can help you if you face foreclosure, get Nolo's book Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Patricia Dzikowski and Stephen R. Elias. Also, Solve Your Money Troubles: Debt, Credit & Bankruptcy contains everything you need to know to get out of debt and repair your credit.