How to Avoid Foreclosure
If you’re worried about losing your home to foreclosure due to missed mortgage payments or a change in your financial situation, it’s important to take action.
First things first: Call your lender at the first sign of trouble.
Your lender doesn’t want foreclosure any more than you do – foreclosures are time-consuming and expensive for the lender and sometimes do not cover the entire cost of the loan. If you’ve encountered a financial hardship or missed a mortgage payment, do not be afraid to talk to your lender. In fact, the sooner you call, the greater your bargaining power, especially if you have a good payment history up to this point.
You also may receive mail from your lender that contains information about foreclosure prevention options. It’s important to open all mail from your lender .
What to discuss with your lender
When you contact your lender, be prepared to discuss your financial circumstances. There’s no guarantee that your lender will be able to help, but many lenders are willing to explore every option.
Be prepared with your loan account number, an explanation of your situation, recent income documents (such as pay stubs, social security benefits, unemployment information, etc.), and a list of current household expenses.
Here are some options the lender may want to discuss:
- Re-budget
The lender may work with you to identify places you could cut to meet your mortgage payments and may suggest liquidating some assets to free up cash. Depending on your situation, the lender may agree to postpone your payments until you get your back on your feet. This solution assumes your cash-crunch is temporary.
- Refinance
Discuss refinancing options with your lender – are there any loan programs that will lower your payment? Do you have a lot of equity in your home that could be cashed out to cover your debts?
- Restructure the loan
If you can’t afford to refinance, see if your lender will agree to change the terms of your loan to lower your payment, either by changing the loan from an adjustable-rate to a fixed-rate, or by lengthening the term from a 30-year to a 40-year.
- Sell your home
This may seem like an extreme option, but it could make good financial sense if you are in danger of missing mortgage payments because it allows you to control your financial destiny. If you can no longer afford your home, consider selling and buying something more affordable, or renting for a while.
Last resorts
If keeping your home or selling your home on your own is not an option, the following may be alternatives to foreclosure.
- Short-sale
In a short-sale, the lender agrees to accept the proceeds of the sale in return for forgiving your debt, even if the proceeds are less than the amount you owe. With this option the impact to your credit is less severe than with a foreclosure. Lenders may agree to this option because it is a faster than a foreclosure.
- Deed-in-lieu of foreclosure
If foreclosure is imminent, see if the lender would be willing to accept the title in exchange for what you owe on the mortgage. The negative impact to your credit is the same as with a foreclosure, but you benefit by getting it over with quickly and moving on to repair your credit. The benefit to the lender is that they can avoid the lengthy process of formal foreclosure. Generally you must try to sell the home for its fair market value before the lender will consider this option.
For more information visit the Foreclosure help page at the U.S. Department of Housing and Urban Development.
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