How to Avoid Foreclosure: Things You Need to Know

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• May 2, 2022
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As much as you try to avoid it, there are many uncontrollable factors that can lead to your home being foreclosed. Fortunately, there are plenty of options and resources available to help you keep your home. Discover everything you need to know about how to avoid foreclosure.

How to Avoid Foreclosure

The key to saving your home from foreclosure is being proactive. The truth is, lenders don’t want to go through the process of foreclosing your property either. 

Foreclosure is a process, and to avoid it, you have to get ahead of that process. Here are the things you should do to avoid foreclosure.

Don’t get behind in your payments

The further you get behind in your payments, the harder it will be for you to get reinstatement, and the higher the chance you will lose your home.

Get in touch with your lender ASAP

Contact your property lender as soon as you realize you are experiencing a financial problem. They can provide you with help and give you the options you need to avoid foreclosure.

Don’t ignore the mail

As said earlier, foreclosure is a process, and that process starts with the first notices. The first notice from your lender usually comes with options to help you prevent foreclosure. 

If you don’t respond to these letters, you may receive letters of pending legal action. Failure to notice and open the mail is a poor excuse in the foreclosure court.

Know your rights about your mortgage

This is why you should always keep your loan documents in a safe place. Find these documents and read them. This will give you an idea of what your lender may do if you fail to make your mortgage payments.

Also, it’s best to learn more about your state’s foreclosure laws and timeframe. Each state is different. You can contact the Government Housing Office for help.

Under Federal Law, in most cases, lenders cannot start the foreclosure process until you are more than 120 days delinquent in your payments.

Know the loss mitigation options

There is plenty of information about this on the internet. Some of your options will include:

• Loan modification – This will change the terms in your loan. You can opt to extend the time you need to pay off the loan or ask for a reduction of the interest rate. 
• Forbearance agreements and repayment plans – If the reason you are falling behind your monthly mortgage payment is temporary, you may be eligible for a forbearance agreement. This will allow your lender to suspend the payments temporarily or reduce the amount you have to pay. At the end of the agreement, you will be asked to pay back the missed or reduced payments in full, with the help of a modification or repayment program.

Review your finances

When it comes to your finances, your home should be one of your priorities. Review your finances and cut out unnecessary spending in order to meet your monthly mortgage payment. Cut your unnecessary shopping, cable TV expenses, club and gym memberships, and various forms of entertainment for a while. You can delay your other “unsecured” debts and credit card payment for a while until you have paid your mortgage.

Use whatever asset you have

You can sell your jewelry, a second car, or even your life insurance policy to help reinstate your loan. You can even get a second job if needed until you pay your mortgage.

Avoid foreclosure prevention companies

Whatever you do, stay away from loan modification, for-profit foreclosure rescue, or foreclosure prevention companies. One thing you need to know is you don’t actually need to pay fees for foreclosure prevention help. These companies will contact you and offer help to negotiate with your lender, and they can sound really promising. While they are legitimate businesses, their services come with a hefty fee. Use that money to pay your mortgage instead.

Again, you can contact your HUD-approved housing counselor for help.

How to avoid foreclosure: your alternatives

Here are some prevention alternatives you may consider when you see that foreclosure is in the near future.

• Reinstate your loan – if you have enough money, pay all the missed payments, including the principal and interest, fees, and various expenses.
• Enter a repayment plan – You can ask for a repayment plan to make up for missed payments over a certain period of time while keeping your current and ongoing payments. For this to work, you need to pay both the current and overdue amounts. This usually lasts three, six, or even nine months, depending on your situation. 
• Forbearance Agreement – As discussed earlier, this agreement allows the lender to reduce your mortgage payments or pay nothing at all for a certain period of time. 
• Loan modification – This can lower the interest rate, add overdue amounts to your loan balance, and extend the term of your loan (i.e. from 30 years to 40 years). 
• Refinance – This allows you to start fresh and gives you the opportunity to redeem your mortgage. Unfortunately, this is difficult if you have a bad credit score, which happens if you have late payments or pending foreclosure. 
• File Chapter 7 or Chapter 13 bankruptcy – While these options can help delay your payments for a couple of months, these should be your last options. It is never a good idea to file for bankruptcy.

If all else fails, you can sell your home or give it to your lender

Short sell – If you have equity in your property, you can actually make money out of it by selling it. Note that the sale is way less than the loan’s balance. You can then use the money to pay off your mortgage loan to avoid bad credit due to foreclosure. This option may cause tax liabilities on your end.

Deed in lieu of foreclosure – To avoid foreclosure, you can hand the property over to your lender. Make sure you have the agreement in writing that says your lender will not go after you for any deficiencies (difference in fair market value and outstanding debt you have in the property) after the property is sold. This may also cause tax liabilities on your end.