How to Avoid Foreclosure of Your Home

In a perfect world, your mortgage would always be paid on time. Unfortunately, things happen. Sometimes we find ourselves in unexpected situations that leave you facing a home repossession or foreclosure. Last year in the U.S., the home foreclosure rate was 0.51% which is the lowest the rate had been in years. While the number of people that receive foreclosure notices is much higher, many are able to stop these proceedings in their tracks. 

 

The first thing to remember if you find yourself with this scary reality is that you have options. Remember, your bank doesn’t want to repossess your home. They want this issue resolved, and that means they’re likely willing to work with you to find a solution. 

If your home is in danger of being repossessed or foreclosed, don’t delay. The earlier you begin taking action, the more options you’ll have to avoid losing your home. Is your home in jeopardy? If so, follow these steps to learn how to avoid an extreme outcome. 

 

 

1. Contact Your Mortgage Lender

This step is easily the most intimidating. If you’re finding yourself in a position where your home is at risk of repossession, odds are you’ve been avoiding the calls and letters for a while now. It’s scary to face problems like debt head-on, but remind yourself that your bank wants to work with you. 

 

Think about it this way: the bank wants to get paid. Repossessing a home is a hassle, and they’d much rather come to a solution that works for both parties. Your first step should be to contact your lender as soon as you realize you’re struggling. If you find yourself falling behind on payments, it’s time to call. Lenders have options to help borrowers through these difficult times, and they might be able to find a repayment plan that works for you. 

 

 

2. Foreclosure Alternatives

To prevent a foreclosure which wreaks havoc on your credit, look into alternatives approved by your lender. From government programs to a short sale, you don’t have to accept your home repossession at face value. Here are a few options that might work in your situation:

  • Making Home Affordable – This federal program offers both an option for a loan modification and for refinancing through your lender. 
  • Principal Reduction Alternative – If your home is now worth less than when you purchased, you may qualify for this federal program. It’s designed to help homeowners reduce the amount they owe on their home. 
  • Short Sale – A short sale is when the lender allows the homeowner to sell their home for less than the amount owed on the mortgage. This is an effective way to avoid foreclosure. In most cases, the lender will turn the home around and sell it through an auction after the foreclosure process anyway, so they’re amenable to this solution. 

 

For all of these options above, you’ll want to speak to your lender. They will review your unique options and how to proceed if you wish to continue with a federal assistance program or a short sale. 

 

 

3. Bankruptcy

Bankruptcy might seem extreme, but it halts a foreclosure dead in its tracks. When you file a bankruptcy petition, you are free from debt collectors including your mortgage lenders. As soon as your lender is aware you’ve filed for bankruptcy, the repossession process is frozen. 

While this doesn’t let you off the hook for your debts, including your mortgage, it allows you more time to recover your finances. Under the law, your mortgage lender and any other creditors need to work with you in good faith to create a payment plan that works for your situation. Before filing for bankruptcy, speak with an experienced attorney to learn how the process would apply to your situation. 

 

If you find yourself facing a home repossession or foreclosure, don’t panic. The majority of homes that receive this notice don’t actually get foreclosed upon. The best way to avoid this extreme outcome is to work with your mortgage lender as soon as you find yourself struggling financially. From there, you’ll want to look into assistance options. Ultimately, you need to stay persistent. Don’t take a foreclosure notice as a death sentence. You still have options until the case is officially closed. 

How Does Home Foreclosure Work?

The world of home foreclosure can be confusing to those new to real estate. Buying a foreclosure is a great way to find a good deal, especially in competitive markets. Home prices are expected to rise 4.3% next year and 3.6% in 2020 which is twice as fast as the speed of inflation. 

Because of this competition, a lot of buyers are interested in foreclosed properties, but it’s not as simple as it seems at first glance. Foreclosed homes belong to the bank, and before this, they belonged to a homeowner who left the home either voluntarily or involuntarily. There are a lot of aspects to foreclosure to consider, from why the seller lost their home to the auction process. 

 

 

What Causes Foreclosure?

The first thing to understand is just how the seller went into foreclosure in the first place. Foreclosure is what happens when a homeowner no longer pays their mortgage. It’s a legal process in which the owner forfeits their rights to their property to the bank. 

When people think of foreclosure today, they likely picture the market crash of 2008. During this time, many homeowners walked away from their homes simply because the value dipped so low. Today, however, homes go into foreclosure for a number of reasons. While we refer to the owner of the home as the “homeowner,” it’s important to realize that this term is misleading. Because the homeowner has a mortgage, they’re actually a “borrower.” Most mortgages are considered “secured” loans, and that means the lender can recover a portion of the debt by seizing the property and reselling it. 

 

 

Foreclosure Process

The foreclosure process is lengthier than most buyers think. After the borrower fails to make timely payments on their mortgage for 3-6 months, they’re given public notice. This is technically called a Notice of Default (NOD) in many states. This notice lets the borrower know they’re in danger of losing their rights to the property. 

 

After the NOD from the lender, the borrower enters a period called pre-foreclosure. This can last up to 120 days, and this is when the borrower will attempt to find an arrangement with the lender. They might choose to pay the amount owed or opt for a short sale. A short sale is the sale of a home for an amount that is less than the unpaid mortgage. 

 

Many home investors actually prefer to purchase homes during the short sale before the foreclosure proceedings are final. However, if there’s no agreement reached between the lender and the borrower, the foreclosure continues into an auction. A foreclosure auction is also known as a Trustee Sale, and the home is auctioned off to the highest bidder for a cash payment. 

 

It’s important to note that besides needing to purchase auctioned properties in cash, buyers also must purchase them “as is.” This means there are no inspections allowed before making an offer. Because there’s no way to assess the property, it’s important to be aware of risks like structural or interior damage. 

 

Finally, if the home is not sold at the auction, the lender reclaims ownership. This is called a bank-owned property or REO (real estate owned). These home are then re-sold through a local real estate agent or through the open market. They might even be sold through a liquidation auction. 

 

 

Real Estate Foreclosures

While real estate foreclosures can be a reliable way to get a steep discount on a home purchase, it’s a complicated and often risky process. It’s in the buyers best interest to find a real estate agent who specializes in auctioned and foreclosed properties to help navigate these homes. 

 

After the auction process, banks often sell foreclosures in bulk. This means the lender will package several properties into one transaction and sell them all at once. This can offer an even more significant discount. The real picture of home foreclosure is often an ugly one, and it’s important to take this process seriously as a buyer.