When you fall long enough behind on your home mortgage, the bank has the right to take possession of your home. In America, we call this foreclosure. It’s not a good situation. Not one bit. When I was a kid, our home was on the verge of foreclosure.
My parents were fighting nonstop and going through a nasty divorce. Amidst that headache, came another layer of complexity. We were months behind on the house and the home had entered into pre-foreclosure.
Pre-foreclosure is the period after the bank files something called a Lis Pendens with the court. It’s a legal notice informing the court of a pending legal action. It’s the first step in several steps that ultimately lead to foreclosure and having your home taken away.
If you’re struggling with foreclosure or pre-foreclosure, my heart goes out to you. It’s likely a period of high stress. And that takes its toll on everything and everyone around you. But most people don’t realize that there are many ways that you can save your home from foreclosure.
Now, some of these ways may not be the best for you. It really depends on your specific situation. For example, certain methods have a long-term impact on your credit score, while others don’t. Other methods rely on the amount of equity in your home or your current interest rate.
Either way, this is not legal advice so ensure you seek the advice of an attorney and your account. My goal here is simply to educate you on the options you have in front of you. There are many more than you likely even think.
What Is Foreclosure?
Foreclosure is a legal process. It happens when a lender needs to recover the balance on a home loan from someone who stopped making payments. Meaning, if you stop making payments on your home, eventually, a lender can sell it to recover the amount owed.
Legally, the foreclosure process can start after 120 days of non-payment. However, a process called pre-foreclosure can start anywhere between 30 days and 120 days. If you’re getting behind, there’s no time to wait. You must act now to save your home from foreclosure at any cost.
Because, at the end of the day, the consequences of having your home foreclosed on are massive. And the effects to your credit and financial health can last for years, and in some cases for even a decade or more. It makes everything that much more difficult when you have a foreclosure on your record. So you have to avoid it any way that you can.
So how do you do that? How do you save your house and avoid losing everything you’ve worked for your entire life? That is not an easy situation to be in. Most people who are about to lose their home to foreclosure typically lost a job, are going through a divorce, or got hit with sudden or unexpected expenses. I get that, but avoiding or ignoring it is not the solution. So here’s what you do next.
1. Loan Modification
When you borrowed money from your lender to buy your home, you signed an agreement. That agreement outlined a plan to pay it back. This is called your mortgage. But when you can’t pay your mortgage on time, there is a way to contact the bank to ask for something called a loan modification.
It might sound complicated. But it’s not. All you’re doing is contacting the lender to make a new plan. This can help you avoid foreclosure but it doesn’t work all the time. You have to get the lender to agree to work with you. Sometimes they’re willing to. Sometimes they’re not.
So what does it mean when you modify your loan?
It can mean any of the following:
- Paying less money each month.
- Paying for a longer time.
- Changing the interest.
This may help you keep your home and avoid foreclosure. Again, it doesn’t work all the time. However, if you stay persistent and keep calling your lender, it might just work. You’ll need to connect with someone there who’s compassionate and caring. It is possible. And it can happen. But you must not get discouraged if they say no the first time. Keep trying.
However, keep this in mind. You will not get approved for a loan modification unless you’ve missed at least one or more payments. That’s going to hurt your credit to begin with. And so is the loan modification, if it gets approved.
So how do you request a loan modification? What do you say? Do you call or do you send a letter? And what’s the success rate? Your best bet is to send a registered letter to your lender. Here’s what you should say in that letter.
2. Forbearance Agreement
Another way to save your home from foreclosure is what’s called a forbearance agreement. This is different than a loan modification. In the case of forbearance, the lender is allowing you to pause or reduce your payment. But only for a limited time. In other words, it is not permanent.
Forbearance is good when you’re struggling through a rough financial patch. It allows you to get back on your feet. However, keep in mind that lenders are not always willing to work with you. This was actually common in the wake of the pandemic, where lenders were very willing to cooperate. But it’s a tougher sell now.
If you can get a forbearance, do it. It does involve calling and writing to your lender. Meaning, you’ll have to interface with them and tell them you’re struggling. And this often only works when you’re behind on the payment.
Here’s a quick overview of how this works. When you borrow money from the bank, you promise to pay it back. That’s your mortgage note. When you can’t pay it right now, forbearance is kind of like taking a small break from your payments. Almost like a vacation, if you will.
But you still need to pay it back later. It’s a method to help when you need a little extra time paying things back. But like a loan modification, this is not guaranteed. Either way, to ask for a forbearance, you have to talk to the bank.
3. Refinance Your Mortgage
If you’re behind on your mortgage and you want to save your house from foreclosure, there’s always the option of refinancing. Depending on the prevailing rates and your credit score, this could be an option for you to get some quick relief.
Keep in mind that refinancing during a foreclosure can be a challenge. Chances may be slim, especially if you are severely behind on your payments. The best time to start this is before you get behind. But regardless of the situation, you should do anything and everything you can to make sure the bank does not foreclose on your home.
First, you must contact the lender. Talk to them and explain the situation. And figure out the next steps. If you’re not behind, this will be easier to do. If you are behind, find a mortgage broker who can help by submitting your application to multiple lenders.
Your best bet is to stay current with your payments. If you can’t stay current, get a loan, pawn jewelry, sell your items at a garage sale or on eBay, and basically do whatever you can do to make money online or offline.
4. Sell Your House
One way to save your home from foreclosure is to simply sell it. To do this you can speak to a real estate agent and go down the traditional route. But if you need to sell your house fast, selling it with a realtor likely won’t work. Selling it with a realtor will take time.
Obviously, it depends on how hot the real estate market is. When interest rates are high, your house will sell slowly, if at all. When interest rates are low, clearly your house can sell much faster. However, if your home is in pre-foreclosure or foreclosure, you should sell it with a company like Fast Cash Offers, OfferPad or OpenDoor.
Keep in mind that when you sell your house through one of these companies, you’re getting a cash offer with a fast close. You don’t need to wait around for months. It’s almost instantaneous. Of course, your house must be in the United States. But it’s pretty simple and straightforward.
You can even, in some cases, sell your house and then rent it back. If you have some equity in the home that might be a possibility. If you don’t, then it’s best to sell your house with a reputable company that can pay you cash and get you out of your situation.
5. File Bankruptcy
The last option you have to save your home in the case of foreclosure is simply to file for bankruptcy. It’s certainly not the best option. But when you have no other choice, and you want to save your home through a foreclosure, and just can’t pay or sell it, this is one potential path.
Keep in mind that bankruptcy is going to destroy your credit for a long time. Sure, you’ll get out of paying for most of your debt, especially in the case of a Chapter 7 bankruptcy, but it will be at the cost of your financial future for a long time.
Bankruptcy occurs when you tell the court you just can’t pay back the money you owe creditors. At that point, the court assists you through the process to either pay back none or some of it. When you pay back none, it’s called Chapter 7. That’s the most common type. When you agree to pay back some, it’s called Chapter 13.
When you file for bankruptcy, the court orders something called a “stay,” which means that for a certain period, creditors must stop their actions. This not only includes foreclosures but also vehicle repossessions, and more.
This is really a last resort. Yes, it will save your house, but it will destroy your credit. Of course, you can climb back out of bankruptcy, but it won’t be easy. Your best bet is to find ways you can supplement income and make money fast.