If you have defaulted on your monthly mortgage payment, you could be at risk of foreclosure, but there are steps you can take to prevent this. Here are six tips for how to avoid or lessen the impact of a foreclosure.
Written by Chiara King.
Updated July 28, 2023
If you default on your monthly mortgage payments you put yourself at risk of foreclosure. You can take steps to prevent this. To avoid losing your property, you should act quickly, stay organized, and contact your mortgage servicer. It’s also important to open and read all the mail your lender sends and respond if necessary. If foreclosure feels inevitable, remember there are ways for you to avoid it or at least reduce the negative consequences that come with it.
How To Avoid Foreclosure
Foreclosure is the legal process mortgage lenders use to take back mortgaged real estate when a borrower defaults. The real estate is then usually sold at auction to recover the money the borrower owes. Houses go into foreclosure for many reasons. Sometimes homeowners miss monthly mortgage payments because of financial hardships like medical emergencies or an unexpected reduction in income.
In other cases, homeowners stop making payments because the market value of their home has dropped so they’ve decided to let their home go into foreclosure. No matter how it happens, foreclosure can seriously affect a borrower’s credit score and ability to qualify for loans in the future.
You can’t stop a foreclosure proceeding overnight. If someone tries to convince you otherwise, they’re likely scammers. You should get help from an attorney before taking action to prevent foreclosure. This will help ensure you take the right steps and use any defenses that might apply to you. You can also talk to a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD) to make sure you’re using all available options to keep your home.
1. Try Loan Modification
If you are already behind on your mortgage payments, the first thing you should do is contact your loan servicer’s loss mitigation department to discuss your payment options. You may be able to apply for a loan modification, which permanently changes your original loan terms. A mortgage modification could reduce your interest rate, decrease your monthly payments, eliminate past-due payments, defer payments until a later date, reduce your loan balance, or a combination of these things. Your mortgage holder may spread out your missed payments over a longer term or offer a separate new mortgage loan.
It’s important to stay organized when you’re working with your lender to keep your home. You should create a file for your property’s records and place important loan documents in that file. These documents should include your monthly statements, property tax information, escrow statements, and insurance information. Keeping organized and meeting application deadlines will help you avoid getting a notice of default from your lender. Once you receive a notice of default, you’ve entered the first stage of foreclosure and your available options shrink.
2. Reinstate the Mortgage
You can get a mortgage reinstatement even after getting a notice of default. Mortgage reinstatement is the process of restoring your mortgage after a default by paying the entire delinquency (the amount of the missed payments), including any late fees. You can ask your lender for a reinstatement quote with the exact amount required to reinstate your home loan. If the foreclosure process has already started, you’ll see foreclosure fees on the quote in addition to back payments and late fees.
3. Get a Forbearance Agreement for a Temporary Hardship
If you’re unable to make your monthly payments because of temporary hardship, you could be eligible for a forbearance. In a forbearance agreement, the mortgage holder agrees to suspend or reduce your payments for a limited time, usually 3-12 months. You’ll likely be required to complete a financial questionnaire and provide proof of your reduced income. If you’re approved, your lender gives up its right to foreclose on the property during the forbearance period.
One major potential problem with forbearances is that you have to bring the loan current when the forbearance period ends. This can be a real challenge if the lender requires a lump-sum payment instead of offering a repayment plan. If you have a loan backed by Fannie Mae or Freddie Mac, you can choose to defer the repayment until the loan matures or when you sell or refinance the property. If you don’t have a Fannie Mae or Freddie Mac loan, you may still be able to get on a repayment plan or apply for a loan modification after the forbearance period ends. Your mortgage servicer will be able to tell you your options.
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If Foreclosure Is Inevitable
Unfortunately, sometimes foreclosure becomes unavoidable because of a homeowner’s financial situation. If this happens to you, there are ways to reduce the intensity of the financial blow and/or avoid having a foreclosure listed on your credit report.
4. Do a Deed-in-Lieu of Foreclosure
In a deed in lieu of foreclosure, the borrower voluntarily surrenders their property to the lender to avoid foreclosure. Depending on your state’s regulations and your mortgage holder's rules, this approach can help you avoid paying the remaining balance of your mortgage. You should have an attorney or someone from a housing counseling agency assist you in reading the deed in lieu agreement. You’ll want to make sure the lender can’t sue you for a deficiency judgment.
It may be difficult getting a mortgage holder to accept a deed in lieu. Also, you probably can’t do a deed in lieu if you have any second mortgages, home equity lines, or any non-mortgage liens against your property. You may also get taxed on any mortgage debt the lender forgives because the IRS classifies forgiven debt as income. You’ll want to consult a tax professional to see if you qualify for a tax exemption.
5. Ask the Lender To Approve a Short Sale
A short sale is when you get permission from your lender to sell your property for less than the mortgage balance. If you live in a state where mortgage holders can sue borrowers for the difference between the mortgage balance and the sale price, you’ll want to make sure that your mortgage holder agrees in writing not to sue you for this deficiency balance. You may want to hire an attorney who focuses on short sales to help you through the process.
If you have any second mortgages or a home equity line, you’ll have to get permission for the sale from those lenders, too. That may be difficult because these entities — called junior lienholders — won’t gain much, if anything, from the sale. If you have tax liens, you will also need to get permission from the tax authorities holding those liens. Short sales have the same potential for income tax liability as deeds in lieu, so you’ll want to talk to a tax advisor to see if you qualify for an exemption.
6. File for Bankruptcy
Filing for bankruptcy stops foreclosure in its tracks, even if the foreclosure sale is scheduled for the very next day. This is the power of bankruptcy’s automatic stay, which stops all creditor collection activity immediately once you file bankruptcy. Sometimes it’s possible to keep your home using bankruptcy, and sometimes filing bankruptcy can only buy you a bit more time before an unavoidable foreclosure. Filing bankruptcy to save a home can be risky because both federal law and state laws are involved, so you should consider talking to a bankruptcy attorney before doing this.
If you’re behind on your mortgage payments, filing Chapter 13 bankruptcy may allow you to keep your house while you pay back your missed payments over a 3-5 year period. You’ll need to be able to make your regular monthly payments, too. If you’re not behind on your mortgage and you don’t have much equity, you can usually keep your home through a Chapter 7 bankruptcy. If you are behind on your payments, filing Chapter 7 will only delay foreclosure. But it can still help you avoid liability for a deficiency judgment when the mortgage company sells the property.
Foreclosure can’t be stopped overnight, but there are things you can do to delay, prevent, and lessen the impact of a foreclosure. If you are experiencing a temporary financial hardship, you can apply for a forbearance to reduce your monthly payments. You can also reinstate your mortgage by bringing all past-due amounts up to date, or you can apply for a permanent modification of your payment terms. If foreclosure becomes unavoidable, you can ask your lender to approve a deed in lieu of foreclosure or a short sale. You can also consider bankruptcy as a way to save your home or delay a foreclosure sale.