Top Options When Facing the Foreclosure Process
If you’re entering into the foreclosure process, it’s important to know that you have options. Protect your credit and your financial future by investigating these ways to avoid foreclosure.
Foreclosure is a scary word for any homeowner having trouble paying the mortgage. If your personal financial situation has deteriorated since you bought your home, you may not have the funds to pay your monthly mortgage payment. While the prospect of foreclosure can be frightening, you have options for getting back on your feet. We’ll go over what happens in a foreclosure and how you can mitigate the damage to your finances.
What is foreclosure?
Foreclosure is the consequence of defaulting on your mortgage payments. Through this legal process, your lender can collect what you owe by repossessing and selling your property. How does a foreclosure work? While the process works differently in each state, you can generally expect the following phases of foreclosure:
1. Default: If you stop making payments, your lender may reach out to you by phone. If you default for three months or more, your lender will likely mail you a demand letter, which is a warning to bring your payments up to date within 30 days.
2. Notice of Default: Once you’re at least 90 days past due, your lender will send you a notice of default. You’ll then have 30 days to pay your outstanding debt before the foreclosure process starts.
3. Foreclosure Initiation: Depending on your state, your lender may file a lawsuit to initiate foreclosure, or a non-judicial process may begin. You’ll still have a few months (30 to 120 days) to pay up before your property goes to auction.
4. Sale: After your lender provides a notice of sale, your property will be sold at auction to the highest bidder.
5. Eviction: Whether the bank keeps the property or sells it to a new owner, you’ll need to move out once the auction is complete.
Options to avoid foreclosure
The best choice for you will depend on your unique situation. Consider the amount of equity and cash reserves you have, along with the length of time you’ve been in default. These will impact the options available to you. But if you’re facing foreclosure, you might consider one of the following strategies instead.
Talk it out with your lender
Your lender may have options for you to reduce your monthly payment. This is especially true if it’s still early in the foreclosure process. Be honest about your financial situation and your budget, then request that the lender modify the terms of your loan. It’s worth a try!
You may qualify for a lower interest rate, change your loan structure, or extend the repayment terms — any of these changes could help you achieve a more affordable monthly payment. Loan modification is different from refinancing, which requires a closing process.
During the past few years, home equity has skyrocketed due to major gains in appreciation. If you have at least 20% equity in your property, you may be able to achieve more affordable monthly payments by refinancing. Refinancing replaces your existing mortgage with a new one that has a lower interest rate and/or a different term or structure.
Extending the term and lowering the interest rate can both decrease your monthly payment, but you’ll incur closing costs. If you’re strapped for cash, you can sometimes avoid paying them upfront, but that’ll require you to pay more interest over time. You’ll want to use a refinance calculator to ensure you’ll break even before you plan to sell.
When you request forbearance, you’re asking your lender to reduce or pause your required payments during a period of financial hardship. You’ll be required to pay back what you owe with interest eventually, but it can give you some time to get back on your feet.
Since the onset of the pandemic, millions of homeowners have been granted forbearance due to Covid-related financial hardship. If you have a mortgage backed by Fannie Mae, Freddie Mac, or the HUD/VA/USDA and you entered into an initial forbearance plan by the deadline, you may be legally eligible to receive additional forbearance.
Even if your loan isn’t federally-backed or your hardship isn’t Covid-related, it’s worth reaching out to your loan servicer to explain your situation. Whether you’re experiencing a medical issue, family emergency, or job loss, your lender may be willing to work with you before resorting to foreclosure proceedings.
Conduct a short sale
Your lender must sign an agreement to execute a short sale. In this transaction, you sell your home for less than you owe on your mortgage. In some states, the lender is required to forgive the difference — if not, you should request that the lender release you from your obligation to pay the deficiency. But in either case, bear in mind you may be required to pay income tax on the forgiven amount. Be sure to discuss this with your CPA.
Sign a deed in lieu of foreclosure
Foreclosure can slash your credit score by more than 100 points and impact your borrowing for seven years, so it’s best to avoid it if you can. If you don’t have any outstanding home equity loans, you can ask to transfer the deed to the lender without a foreclosure process. Again, you may want to request that the lender release you from paying any remaining balance. Get an agreement in writing.
Ask for help
If you’re feeling overwhelmed, you can get help from a housing counselor. They’ll review your financial situation and help you make the best decision. There also may be financial assistance programs offered by your state or local government. And if your hardship is a result of Covid-19, you may be eligible to receive money from the Homeowner Assistance Fund.
Sell your house fast with Sundae
If your home is worth more than you owe, a quick cash sale will allow you to repay your lender and avoid foreclosure. You may even be able to walk away with some pocket money. With Sundae, you can close in as few as ten days. You can even get a cash advance of up to $10,000 in certain locations to hold you over. That could help with relocation costs.
Sundae is different from an iBuyer, so you won’t have to worry about hidden fees cutting into your profits. Instead, you’ll enjoy a straightforward process void of additional fees to Sundae. We’ll list your home on our marketplace and market it to thousands of investors, so you can get multiple offers from competing investors. That way, you can expect a fair offer price, even without spending any money on repairs.