A Homeowner’s Guide to Avoiding Foreclosure

Going through a foreclosure makes life stressful, and it can feel like no one is giving you a straight answer about your options. While you might feel powerless, you have many choices in how to avoid foreclosure. If you take action before the proceedings are complete, you can stop the bank from foreclosing on your home.

How Does Foreclosure Work?

A foreclosure allows the bank to collect the money owed on a mortgage by repossessing the property and selling it. When the bank repossesses a property, the homeowner loses ownership, along with any money that they’ve already paid back to the bank.

After your mortgage is over 90 days late, your lender will begin to file paperwork to collect on the loan, which begins the foreclosure process. If you want to avoid entering foreclosure, you must make arrangements with your lender to satisfy your loan debt. If you cannot reach an agreement with the bank, then your home, investment, and credit are at risk.

Because a foreclosure leaves the homeowner with nothing, it’s in their best interest to sell the property and pay off the loan before the bank takes it. Even if they sell the home for less than it is worth, the homeowner may be able to salvage some of their investment and their credit by selling.

How Can Homeowners Avoid Foreclosure?

Loan Modification – A loan modification allows the borrower to negotiate new terms with their bank, such as a lowered payment. A loan modification is only a good option if you can afford to make the new payments. Loan modifications can be difficult to get approved by the bank.

Partial Claim – A partial claim is an interest-free loan from the U.S. Housing and Urban Development Department (HUD). You may qualify for a partial claim if your payments are 4-12 months delinquent. This loan will allow you to bring your mortgage up-to-date, and you’ll pay back HUD after you pay off your mortgage.

Bankruptcy – Filing for a Chapter 13 bankruptcy will immediately stop your foreclosure process, and your lender will have to accept your lawyer’s plan for your repayment of the loan. While it will stop the bank from taking your property, bankruptcy is only an option if you can both pay for a lawyer and begin making payments according to the new repayment plan. Bankruptcy will also hurt your credit for seven years.

Forbearance – A forbearance allows a borrower to delay their payments. Usually, the borrower must not be in default in order to qualify. If the bank approves the forbearance, then you won’t have to make payments for a set period of time. However, once the forbearance ends, your payments will increase, so it’s only an option if you know you can pay higher payments in the near future.

Deed-in-Lieu of Foreclosure – If you’ve tried selling your home, don’t qualify for any other options, and don’t owe an FHA loan, then you may be able to turn your home over to the bank and accept the foreclosure. The benefits of a deed-in-lieu of foreclosure is that you can walk away from the debt on better terms and will likely be eligible for another home loan sooner.

Sell your home – Selling your home allows you to walk away with your mortgage satisfied, your credit intact, and in some cases part of your investment in the home, depending on how much you still owe. The key is selling quickly, which can be difficult in the current market. A great avenue for a fast sell is to look for home investors, many of which offer quick cash payouts.

Short Sale – A short sale allows you to sell your home for less than it is worth. While you’ll have to get approval by your lender, a short sale allows you to pay back a portion of the money you owe to satisfy the debt. It also allows you to be eligible for a new home loan in just two years compared to five if you have a foreclosure. If you need help getting your short sale approved, many home investors can help you through the process.

Steps to Avoid Foreclosure

Check your finances to see if you can afford to fight the foreclosure.

  • Can you afford to resume making payments if you’re approved for a loan modification or a partial claim
  • Can you afford a lawyer to file for bankruptcy?
  • Will you be able to pay a higher mortgage in the future if you choose a forbearance?
  • Can you afford to just give the home back to your bank?
  • If you sell your home, could you possibly get money back? Do you want to keep your credit intact?
  • If you know you owe more than the house is worth, would you still like to sell it so that you can get a new home sooner?

Calculate how much you can afford to pay towards a mortgage or rental.

  • Make a budget to see how much you can afford to pay.
  • Decide if staying in your home is possible.

Choose the foreclosure avoidance method that works for you.

  • Decide which option meets your needs and finances.

Take action to avoid foreclosure.

  • Follow through on your foreclosure avoidance method.
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