Foreclosure was likely the farthest thing from your mind the day you closed on your home. But sometimes, life circumstances intervene and leave you unable to pay your mortgage. Fortunately, there are steps you can take to help avoid foreclosure. Here’s our guide.
Don’t avoid, communicate
Say you’ve fallen behind on your mortgage payments because of a job loss, financial reversal, divorce, or health crisis. Scared and embarrassed by your dilemma, you may be inclined to avoid your mortgage company’s letters and phone calls. Unfortunately, that’s the worst thing you can do.
You must respond when your mortgage company writes or calls. Better yet, be proactive and contact your lender as soon as you see you are in trouble. A borrower in a tight spot who explains his situation and requests help can often work out a plan with the mortgage company that helps him keep the house.
Steps to avoid foreclosure
Once you’ve shared the details of your situation, your lender may offer you some form of relief to avoid foreclosure.
- Your mortgage company may agree to a repayment plan in which you catch up on your missed payments over time. For example, if you missed a few payments but can now resume paying, the mortgage company may agree to let you add a couple of hundred dollars per month to payments to catch up. Or you may be allowed to make up the missed total at a later day under specific terms. These plans are known as repayment or forbearance programs.
- If the interest on your adjustable-rate mortgage is about to increase and you can’t pay it, your lender might be willing to delay the increase.
If you have sufficient equity in the home, your lender may be willing to refinance your loan. The missed payments can be rolled into the new balance.
- You also may be able to borrow from a government program that grants loans to pay off unpaid mortgage balances. Another option is to rent out your home at an amount equal to your monthly payment. You move to a more affordable place while you catch up on your back payments.
Selling your home may be a way to avoid foreclosure and protect your credit. For this option to work, your house must sell for enough to cover selling costs and pay off your loan balance in full. If the home is worth less than your loan balance, you can request permission from your lender for what is known as a short sale. This option will negatively affect your credit, but not as severely as a foreclosure.
When foreclosure proceedings have begun
If you haven’t been able to work something out, you’ll be served a notice of default. Once that happens, your options narrow. Still, a few remain.
- You may still be able to sell your home, or short sell with the lender’s permission.
- You can offer your lender a deed in lieu of foreclosure. By surrendering your house to your lender and signing over its title, you save the lender the legal costs and time of foreclosure. This option is simpler than foreclosure but will negatively affect your credit in the same way.