How Foreclosure Can Help You Save Money

Learn about your options once you decide to give up your property.

People who think that a foreclosure is inevitable sometimes pack up their belongings and immediately look for a new place to live. They fear losing reliable shelter and want to find another home as soon as possible where they’ll feel secure. Staying in a house facing foreclosure can be terrifying if you think you might end up out on the street. And it might be unbearably depressing if you're reminded every day that you won’t be living there indefinitely. (To learn what to do, and what not to do in a foreclosure, read Foreclosure Do's and Don'ts.)

While these reactions to foreclosure are certainly understandable, foreclosure can actually be a time of opportunity. You will most likely have plenty of time to find a new place to live. Meanwhile, staying put for a while may prove to be a big financial advantage. So, try to put your fears aside as you assess your options to come up with the best choice for your circumstances.

Your Options Once You've Decided to Give Up the Property

Here are a few potential options once you’ve decided to give up the home.

Sell Your Home

If you have equity in your home (the house is worth more than you owe), you might be able to sell it quickly by pricing it aggressively—which means low—and then pay off the mortgage loan. You might even be able to leave with some money in your pocket.

Stay In the Home During the Foreclosure

The single most important point to understand is that you don’t have to leave your house just because the bank has started foreclosure proceedings. Foreclosure can actually provide a great opportunity to save some serious money. That’s because foreclosures can take a few months or, in some cases, as much as a year—or even longer in states where foreclosures take a really long time, like Florida and New York.

While the foreclosure goes on, you won’t have to move—or make any payments for your housing. In most states, you’ll probably be able to stay long enough to plan for the future by saving all or some of the money that you’re no longer putting toward the mortgage.

How much time you’ll get to remain in your house and how much money you can save, depends on these factors:

  • How soon you decide to stop making payments. If each month you struggle to come up with enough money to make your mortgage payment and you know the payments are unaffordable for your situation, you might just be throwing good money after bad. In some cases, it might make sense to save that money to put towards future housing and let a foreclosure happen.
  • Whether you apply for a loss mitigation option.Loss mitigation” is what banks call the process of working out a way to avoid a foreclosure, like with a modification. Under federal mortgage servicing laws, as long as you submit your complete application more than 37 days before the sale, the servicer generally has to stop the foreclosure after you apply for loss mitigation while it reviews your application. Even if you think your efforts will ultimately prove unfruitful, you might receive an offer for an option that will allow you keep or gracefully give up your home. If the servicer doesn't offer you a loss mitigation option, at minimum you’ll get some extra time to live in the home payment-free while the application is pending.
  • Whether your foreclosure is judicial or nonjudicial. Judicial foreclosures usually take longer than nonjudicial ones. (To learn more about how foreclosure typically works in your state, see Key Aspects of State Foreclosure Law: 50-State Chart.)
  • Whether you get the right to live in the home during a post-sale redemption period. In some states, the borrower is able to stay in the property through the expiration of the redemption period or until some other action, such as ratification of the sale, occurs. This provides some extra time to live in the home for free.

Complete a Short Sale

In a short sale, you sell your house for less than you owe on the mortgage loan. For a short sale to work, the bank—and any other parties with liens on the home—have to agree to receive less than you owe them.

The main benefit of this type of transaction is that you might get out from under your mortgage without liability for the deficiency (the amount of the loan that is left unpaid). In order to avoid potentially having to pay the deficiency, the bank has to agree to waive the difference between the sale price and the amount you owe in the short sale agreement. Be aware that if the bank forgives all or part of the deficiency and issues you a 1099-C, you might face tax consequences.

Complete a Deed in Lieu of Foreclosure

With a deed in lieu of foreclosure, the bank agrees to let you sign over the deed to the home in exchange for canceling the foreclosure. You can’t do a deed in lieu of foreclosure if you have multiple mortgages or if you have liens on the property such as those arising from delinquent taxes, work on your home, or money judgments. You must be able to deed clear title to the whole property. In other words, you can’t do two deeds in lieu of foreclosure and split the property between the first and second mortgage lenders, or other lienholders.

Because a foreclosure and deed in lieu of foreclosure affect your credit in about the same way, it might not be worth completing a deed in lieu unless you can get the lender to:

  • agree to forgive or reduce any deficiency (again, you might have a tax liability)
  • give you some cash as part of the deal, or
  • agree to let you live in the home for longer than what you'd get if you let the foreclosure happen.

(Read more about the difference between a short sale and a deed in lieu of foreclosure.)

File for Chapter 7 or Chapter 13 Bankruptcy

Filing for Chapter 7 or Chapter 13 bankruptcy can buy some additional time before the house is sold at a foreclosure sale, and reduce your debt load. (Learn more about how bankruptcy can help with foreclosure.)

Getting Help

How long can you stay in your house payment-free once you decide to give it up? There's no way to give you a precise timeline for your personal situation. Each phase of the process, from your first missed payment to your last day in the house, involves variables unique to your situation. But reviewing federal mortgage servicing rules laws and your state's foreclosure laws will give you an idea of whether you’re likely to have months or years. Once have a rough idea of what to expect, consider talking to a foreclosure attorney in your state or a HUD-approved housing counselor to get a reality check on how fast events are moving in your community and how any of the options mentioned in this article may affect your foreclosure timeline.

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