Most people who sign a mortgage don't intend to walk away from it. Still, unforeseen circumstances -- huge medical bills, lost jobs, divorce or eroding property values -- can overwhelm even the best-intentioned borrower. A simple twist of fate can leave you facing a homeowner's worst nightmare: foreclosure.
Communicate with your lender
Rest assured, where foreclosure is concerned, you and your lender are on the same side. Lenders want your money and the interest that comes with it, not your house. If you seem to be a good risk, the lender will offer to help keep your mortgage afloat. But be forewarned: If you seem like a bad risk, the lender may cut its losses by taking steps to foreclose and evict you as quickly as possible.
The key is to contact the lender before your debt gets the better of you. The sooner your lender knows of your problem, the more help it can provide.
The foreclosure spiral
The foreclosure spiral begins when your loan payment becomes 16 days overdue. At that point, your mortgage servicer will try to contact you to work out a repayment schedule to bring your loan current.
If your first payment becomes 30 days delinquent and the next month's payment looks doubtful, collection attempts begin in earnest. If your payments fall 90 days behind, the servicer will likely refer your mortgage to an attorney or other entity that will initiate formal foreclosure proceedings.
Here's a timeline of the foreclosure spiral:
|Mortgage payment due today, the first of the month. Borrower misses it.|
|Late charge assessed on payment. Mortgage servicer starts attempting to make contact to find out what happened.|
|Servicer sends "demand" or "breach" letter to the borrower pointing out that terms of the mortgage have been violated.
Borrower given 30 days to resolve the situation by paying the delinquent amount.
|Servicer refers loan to foreclosure department. Hires local attorney or other firm to initiate foreclosure proceedings.
Depending on the state where the home is located, the servicer's representative may record a formal notice of foreclosure at the local courthouse, publish details of the debt in the local newspaper, attend hearings on the case and make appropriate court filings.
|House sold at foreclosure sale or auction. Wide time range due to different state requirements.
Borrowers in states with judicial foreclosures -- those in which lenders have to retake property titles via the court system -- can get almost a year to straighten out their affairs before the sale. Those in nonjudicial states have as little as two months.
|After the sale, some states grant borrowers a "redemption period" in which they can rebuy the property if they have the money. Others force consumers out immediately following the auction.|
Ways to avoid foreclosureHere are some options your lender may offer if you miss a payment and want to avoid foreclosure:
Repayment plan: If you suffer a short-term financial setback (expensive car repairs, a medical emergency), your lender may provide some breathing room by agreeing to let you pay off your missed payment in two installments over the next two months.
Loan modification: Mortgage servicers can adjust the terms of your loan -- most often by lengthening the amortization schedule, lowering the interest rate or rolling the delinquent amount into the loan and reamortizing the new balance -- to help you bring the loan current.
Short sale: The lender allows you to sell the house for less than the outstanding loan amount, takes the proceeds and forgives any remaining debt.
Short refinance: The lender forgives some of your debt and refinances the rest into a new loan.
Refinance with a "hard money" loan: You won't like the high rates and fees of a hard money loan -- one from a private lender -- but it may buy you time to sell your home and avoid foreclosure.