If you’ve received a foreclosure notice from your lender, your first reaction is likely, “My house went into foreclosure. Now what?” First, don’t despair. You do have options, but you must act quickly and learn what you can and cannot do in this difficult situation.
TL;DR (Too Long; Didn't Read)
You do have some options if you receive a foreclosure notice. Perhaps the best option is working with your lender to restructure your loan so you can afford to stay in your house.
A Mortgage Foreclosure
A mortgage foreclosure occurs when the homeowner has missed four consecutive payments. The homeowner receives a notice of default, which starts the preforeclosure period. If the homeowner cannot resolve the situation beforehand, the house is eventually sold at public auction. Essentially, a mortgage foreclosure consists of the lender repossessing the property.
Judicial vs. Non-Judicial Foreclosure
Depending on the laws of your state, your foreclosure is either judicial or non-judicial. A few states, such as California, permit either type of foreclosure. In a state with judicial foreclosure laws, the lender files a civil lawsuit in court. For those states with non-judicial foreclosures, a mortgage agreement contains a power of sale clause allowing the lender to foreclose on the property. In either case, the homeowner receives a legal notice of foreclosure and the notice is usually published in the local newspaper, and the house is eventually sold at public auction. With a judicial foreclosure, the court approves the date of foreclosure and subsequent sale. If the house is sold at auction, the lender uses the proceeds toward the mortgage balance. If the proceeds don’t wipe out the balance, whether or not the lender can continue to pursue you for the remaining money depends on state law.
Work with Your Lender
Your lender doesn’t want to foreclose on your house, even though you have missed payments. For the lender, it’s a process involving a lot of time and money. Most lenders will try to work with you to resolve the issue. Perhaps they will allow you to restructure the loan so you can pay back the missed payments. Such restructuring may involve a lower interest rate. If your financial circumstances will improve soon, perhaps because you are starting a new job, your lender may agree to temporarily give you some time to get back on your feet by reducing your payments. Another option that will stop foreclosure, although it will not allow you to stay in your home, is giving your lender a mortgage release, also known as a deed-in-lieu. With this action, you are voluntarily transferring the title.
It’s also critical to make sure that the lender’s information is correct and you really did not make payments. Although you should know whether or not you missed payments, it’s also essential that you make sure the amount the lender alleges you owe is correct. If you really think the lender is mistaken and can prove you made your payments and the lender received them, write the lender a letter to that effect and enclose all pertinent documentation supporting your contention. If the lender disagrees, you can go to court to prove you are not in default. You will need to consult an attorney for advice on this matter.
Finding the Money
Most people going into foreclosure likely don’t have a lot of other financial resources available, but if there are ways you can find the money to stop your foreclosure, do what you can. That may involve selling jewelry, selling a car or whatever other assets you have available. If you took a second job, would that provide you with sufficient income to stay in your home? Do you have family members or friends who would provide you with a loan? Go through your budget with a fine-tooth comb and cut it to the bone to see if that would make a difference. Basically, leave no stone unturned or option discounted when trying to come up with the funds.
Home Sales and Short Sales
For many homeowners, the answer to “My home was foreclosed on, now what?” involves selling the property. Prior to the auction, you can sell your house and pay the lender all the money owed, which will include back payments and penalties, according to Realtor.com. Although you no longer own your home, you aren’t going to take the serious credit hit that occurs when your house is foreclosed. That means you may qualify for a mortgage for a less expensive home. If your house is foreclosed, it may take five years or more for you to qualify for another home loan, although it is just three years if you go the FHA loan route. Let your lender know immediately that you plan to sell the house and ask if they are willing to postpone the foreclosure and the auction so that you can find a buyer for the property. This is an option you should pursue as soon as possible if other financial alternatives don’t appear feasible.
You must receive your lender’s permission for a short sale. This involves selling the house for less than the mortgage, which is what you owe the lender. Although the lender will not receive the entire amount it lent you when the house is sold, by agreeing to the short sale, the lender considers your mortgage paid in full. For most lenders, accepting a short sale is cheaper than going through the foreclosure process. A short sale is also a consideration for those homeowners who are underwater on their mortgage or owe more than their house is worth in the current market. Keep in mind that a short sale takes much longer than a conventional home sale because of all the additional paperwork required.
Filing for Bankruptcy
Filing for bankruptcy is never an easy decision, but it can help delay or even stop foreclosure. Once you file for bankruptcy, the court will issue an automatic stay to creditors, including your mortgage lender. If you file a Chapter 7 bankruptcy, the sale is postponed for a few months while your bankruptcy is pending. If you file a Chapter 13 bankruptcy, you might keep your house. The back payments become part of your Chapter 13 repayment plan, which may allow you up to five years to pay them off. However, if you can’t make your current mortgage payments, it doesn’t make sense to put together a plan to pay off back payments. If you can make current mortgage payments and are able to keep up with the back payments according to the repayment plan, foreclosure is avoided and you can stay in your house. Consult a bankruptcy attorney for specific advice regarding your situation.
What You Should Not Do
Going through foreclosure is a terrible experience. It’s even worse when it comes out of the blue, which may happen if your spouse is in charge of the finances and you weren’t aware that you were in danger of losing your house. No matter your situation, the worst thing you can do is try to avoid your lender. Sticking your head in the sand is not going to save your home. Just walking away from the house also is not a good idea because the impact on your credit could prevent you from finding a place to rent, let alone purchase. Becoming proactive gives you the best odds for a conclusion that may not or may not save your house, but at least allows you to avoid foreclosure.
- Credit: Understanding Your Foreclosure Rights: A Consumer Law Review
- Nolo: When Do You Have to Leave Your Home When It's in Foreclosure?
- Realtor: Selling a Foreclosed Home: What You Can Do (And What You Can't)
- Know Your Options by Fannie Mae: Foreclosure
- Investopedia: What Is a Short-Sale Property & How Does It Work?
- Nolo: How Bankruptcy Can Help With Foreclosure
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.