Your mortgage payment is probably the most significant expense in your family budget. When money is tight, and you've cut as many other expenses as possible, making those payments still might be hard.
Unfortunately, not paying your mortgage is much more serious than skipping out on some of your other bills. Once you fall far enough behind on your home mortgage payments, your lender will likely foreclose (go through a specific legal process and eventually sell your home at a foreclosure sale to recoup the money it lent you).
However, this situation isn’t hopeless. You can apply for loss mitigation and perhaps receive a way to avoid foreclosure and maybe even keep your home. If you want to keep your home, you might qualify for a forbearance, repayment plan, or loan modification. If you can come up with the funds, you can redeem your home before or, depending on state law, after the foreclosure.
Or, if you'd like to exit the property without going through a foreclosure, you might be able to complete a short sale or deed in lieu of foreclosure. And yet another option is to fight the foreclosure in court.
How Forbearances, Repayment Plans, and Loan Modifications Work
If you want to keep your home, your first step is to apply for loss mitigation through your loan servicer. You’ll most likely have to fill out paperwork explaining your situation to the servicer and why you fell behind. You might be surprised at how much your servicer is willing to help.
After you apply for loss mitigation, you might be approved for:
- a forbearance where you won't have to make any payments, or you make smaller payments, for a specified amount of time
- a repayment plan where you pay a bit extra each month to get caught up on the loan, or
- a loan modification, which adjusts the loan terms, so your monthly payments are more affordable.
Reinstating the Loan (Getting Caught Up on Missed Payments)
Some states have a law allowing a borrower behind in payments to reinstate the loan (bring it current) by a particular deadline, like 5:00 p.m. on the last business day before the sale date or another deadline. Once the loan is reinstated, the borrower resumes making regular payments on the debt.
If your state’s laws don't give you the right to reinstate, your mortgage or deeds of trust might have a clause giving you a deadline by which you can complete a reinstatement. The lender might agree to let you reinstate even if you don't have this right under the law or your loan documents. Make sure you request permission to reinstate the loan a reasonable amount of time before a foreclosure sale.
Generally, to reinstate your mortgage, you must pay the entire past-due amount, including missed payments, interest, late fees, and so on. Also, you'll have to pay the lender’s costs and expenses in trying to enforce the mortgage, like costs and attorneys' fees in its foreclosure action.
It’s best to reinstate as soon as possible if that’s your plan. If you wait until the last minute to reinstate your loan, but the money doesn’t arrive in time—say due to a bank processing error—the foreclosure sale will go ahead. It’s very difficult to get your home back after a foreclosure sale unless state law provides a statutory right of redemption (see below) and you have a lot of cash available.
Refinancing Your Loan to Get Better Terms
You might want to try to refinance and replace your old mortgage with a new one. Of course, you’ll want the new mortgage to have a lower interest rate, which means a lower monthly payment. Also, consider the repayment period. If your current mortgage is for 15 years, a 20- or 30-year mortgage might lower your payments drastically. Shop around for low interest rates and closing costs.
However, if you have bad credit because you’ve missed mortgage payments or have other negative items in your credit history, finding a lender willing to give you a new mortgage loan might be hard. Also, in most cases, refinancing is possible only if you have equity in your home.
Equitable Redemption: Paying Off the Loan Before the Foreclosure Ends
You have the right to redeem your house at any time after default but before your home is sold at a foreclosure sale (called the "equitable right of redemption"). Generally, to redeem the property, you must pay off the mortgage debt in full, plus any damages the lender suffered due to your nonpayment, like collection fees, court costs, and attorneys' fees in its foreclosure action.
If you redeem, you'll then own the property outright, with no mortgage on it.
Statutory Redemption: Paying Off the Debt After the Foreclosure Sale
In some states, you also have the right to get your home back within a limited amount of time after a foreclosure sale. This right is called the "statutory right of redemption."
With statutory redemption, you must pay whatever price the home sold for at the foreclosure sale plus certain lawful expenses, or, in some cases, you have to pay the full amount of the mortgage debt. The laws in your state specify how much you have to pay and how long you have to redeem the property if you get that right.
Is Redeeming a Foreclosed Home a Practical Solution?
Redeeming your home before or after a foreclosure usually requires a significant amount of money and isn’t feasible for most borrowers. Homeowners facing foreclosure don’t normally have a lot of savings or access to money that can be used to redeem.
They also usually have bad credit due to late and missed mortgage payments, so refinancing generally isn’t an option. So, even when the foreclosed owners get the right to redeem the property, most don't have the financial ability to do so.
Still, if you’re one of the rare few who can come up with enough to redeem your home, contact your mortgage servicer to find out how you can exercise your right, the total amount you’ll have to pay, and the deadline to redeem. It’s also a good idea to talk to a lawyer or a HUD-approved housing counselor who can verify your rights under state law or loan documents to ensure the servicer gave you accurate information.
Giving Up the Property In a Short Sale or Deed in Lieu of Foreclosure
If you decide you want to give up the home but avoid a foreclosure, you may apply for a short sale or deed in lieu of foreclosure. One benefit to either of these options is that a foreclosure won’t go on your credit reports. But your credit score will still take a significant hit. When it comes to credit scores, a short sale or deed in lieu is almost as bad as a foreclosure.
For some people, however, not having the stigma of going through a foreclosure is worth the effort of working out one of these alternatives. Another upside to a short sale or deed in lieu of foreclosure is that some lenders offer financial assistance to help homeowners find a new place to live after completing the process.
And you might be able to avoid having to pay a deficiency judgment.
What Is a Short Sale?
A “short sale” is when a lender agrees to let the homeowner sell the home to a new owner for less than what’s owed on the mortgage. A short sale might be a good option if your mortgage is underwater. Avoiding a deficiency judgment (see below) is the main upside to a short sale. If you can't get your lender to agree to waive the entire deficiency, you might be able to negotiate a reduced deficiency amount.
If you decide to proceed with a short sale, do the following to make sure the transaction goes smoothly:
- contact your servicer early on in a foreclosure to learn how the process works, and
- pick a real estate agent who’s experienced in completing short sales.
You should also educate yourself about deficiency judgments and your potential tax liability (again, see below), so you aren’t caught off guard by either of these possible outcomes. You might also want to talk to a lawyer who's knowledgeable about short sales.
What Is a Deed in Lieu of Foreclosure?
With a deed in lieu of foreclosure, the lender agrees to accept a deed to the property instead of foreclosing. Much like a short sale, this transaction could be a good alternative to foreclosure if you owe more than your property is worth. But if you have a lot of equity in your home, a deed in lieu of foreclosure is usually a poor choice. You'd be better off selling the home and paying off the debt.
Because the difference in how a foreclosure or deed in lieu of foreclosure hurts your credit is minimal, it might not be worth it to complete this transaction unless your lender agrees to:
- forgive or reduce the deficiency
- give you some cash as part of the deal, or
- provide you some extra time to live in the home—more than what you'd get if you let the foreclosure happen.
You might be able to get your lender to agree to one or more of these conditions so it can avoid the expense and hassle of foreclosing the home.
What Happens to the Deficiency After a Short Sale or a Deed in Lieu of Foreclosure?
After a short sale, the difference between the mortgage debt and the sale price (called a “deficiency”) might be collectible, depending on state law, which means you might have to pay it. With a deed in lieu of foreclosure, the deficiency is the difference between the mortgage debt and the home’s fair market value. Again, depending on state law, the deficiency might be collectible.
In most cases, subject to a few restrictions in some states, the lender could sue you for a deficiency judgment after a short sale or deed in lieu of foreclosure. So, if state law allows a deficiency judgment after either of these transactions in your state, you’ll want to get the lender to forgive or reduce the deficiency before completing either a short sale or deed in lieu of foreclosure. (However, if the lender forgives some or all of the deficiency, you might face tax consequences.)
Fight the Foreclosure in Court
Talk to an Attorney About Your Options When Facing Foreclosure
Ultimately, getting a notice of foreclosure in the mail—or just having a gut feeling that foreclosure is coming—isn't the end of the road. Look into your options, and don't wait to ask for help if you need it.
Consider talking to a foreclosure attorney to learn more about the foreclosure process in your state and find out what you should do in your situation.
You may also contact a HUD-approved housing counselor to explore different foreclosure avoidance options.