If you’ve struggled with making your mortgage payments and have exhausted forbearance or other relief options, you may find yourself facing foreclosure. Here’s what you can do to stop it.
Why am I in foreclosure?
A foreclosure is generally the last resort for homeowners who’ve had difficulty making mortgage payments and may have already refinanced to a lower interest rate, utilized a loan modification program or considered a short sale or deed in lieu of foreclosure.
Homeowners who’ve experienced a loss or reduction in income — or significantly increased their living costs from when they originally purchased their home — could be in jeopardy, says Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a nonprofit debt counseling organization based in Sugar Land, Texas.
Here are some signs that you may not be able to afford your mortgage, according to Boies:
- You’ve struggled to pay your mortgage on time for a long time.
- Your loss of income is not short-term.
- You’ve depleted all of your emergency savings.
- Your mortgage is more than 30 percent of your current income, and you don’t expect your income to increase reasonably soon.
- You can’t afford your mortgage payment, even if it has been modified or reduced.
- You have an underwater mortgage, meaning you owe more on your home than it is worth.
Homeowners often find their homes in foreclosure if they’ve fallen behind on payments and haven’t made contact with their lender, says Greg McBride, chief financial analyst at Bankrate.
“The options dwindle as more time passes,” McBride says. “The earlier you can get out in front of it, the more time you and the lender have to work on other options.”
How to stop a foreclosure
If the foreclosure process has already started, halting it can be challenging, but not impossible. Ideally, a forbearance can buy a homeowner valuable time to get back on their feet financially before resuming monthly mortgage payments, McBride says. After the forbearance period, if your household income is lower than it had previously been and your mortgage payments are too much to handle, talk to your lender about a loan modification, which could adjust the loan term, lower the interest rate or change the type of loan.
“If that isn’t feasible, then it might be time to consider selling the home and downsizing to something more suitable for the new, reduced level of household income,” McBride says.
Depending on loan you have, other options may include a deed in lieu of foreclosure, a short sale, or making up missed payments during the preforeclosure period. Note that your lender generally has to agree to these kinds of arrangements before you can proceed.
- During preforeclosure, when the home is in the earliest part of the foreclosure process, you may be able to pay the missed mortgage payments to stop the process from moving forward.
- A deed in lieu of foreclosure is when you and your lender agree to transfer the title of the home to the lender. When this happens, you are no longer obligated to repay the mortgage. A deed in lieu can be potentially less harmful to your credit compared to foreclosure.
- A short sale is when you sell your home for less than the amount owed on the mortgage, with the lender receiving the proceeds of the sale and forgiving the difference, in many cases. Like a deed in lieu, a short sale can be less damaging to your credit report.
Filing for bankruptcy can also stop a foreclosure, but it has far-reaching implications and, ultimately, you will be expected to pay a regular mortgage payment, Boies says.
The best-case scenario is to avoid foreclosure altogether, so as early as possible, contact your lender and explain your financial situation.
“There are a variety of payment relief options available on a scale like we’ve never seen before due to COVID, but you have to raise your hand and ask for it,” McBride says.
Consider consulting with a housing counselor, who may be able to participate in a conference call with your lender to go over their recommendations, Boies explains. Foreclosure prevention counseling is free at most HUD-approved housing agencies.
“Your options will vary depending upon the type of mortgage you have and the state you live in,” Boies says. “You will be offered information on all of the options available to you and your counselor will recommend resources and services that will benefit you most.”
The biggest mistake homeowners make is putting their “head in the sand” rather than reaching out to their lender.
“Hope is not a strategy,” McBride says. “Now more than ever, being proactive pays off.”
Featured image by Anatoliy Lukich of Shutterstock.