Avoiding Foreclosure

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If you’ve fallen behind on your mortgage, or know you can’t continue making payments much longer, you can still avoid foreclosure. You need to take action right away. The longer you wait to resolve your mortgage problem, the more likely that you will lose your home.

When considering your options for avoiding foreclosure, try to decide based on what makes the most sense from a pure dollars and cents perspective. If you let your emotions cloud your thinking, you may make a bad decision.

These 11 options can keep you out of foreclosure:

  • Refinance your mortgage. When you refinance your mortgage, you get a new mortgage with terms that are more affordable than your current loan, and you use the proceeds from the new loan to pay off your existing mortgage. Shop around for the most attractive refinancing offer. If you can’t find any lenders willing to refinance your mortgage and your loan is guaranteed by Fannie Mae or Freddie Mac, look into a federal Home Affordable Refinance loan. Find out if you qualify.

  • Modify the terms of your loan. Your lender may be willing to change the terms of your mortgage on a temporary or permanent basis so you can continue to make payments on the loan. For example, the lender may agree to lower your interest rate and extend the loan period, both of which would reduce the size of your monthly payments. Determine if you qualify for a federal Home Affordable Modification. The site also features an online estimator you can use to figure out what your mortgage payments will be if you qualify for a modification.

  • Negotiate a mortgage forbearance agreement with your lender. A forbearance agreement lets you pay just a portion of your regular monthly mortgage payments for a limited period of time. Some forbearance agreements even let you skip your payments entirely for a while. However, once the forbearance period ends you’ll have to begin making your regular loan payments again. To wipe out your loan’s past due amount, you’ll also have to pay your lender a little extra each month. This means that until you pay off the arrearage, your total monthly mortgage payments will be larger than they were before the forbearance agreement began. For this reason, forbearance is a realistic option only if the financial troubles that caused you to have problems paying your mortgage are temporary and you just need a little breathing room to get back on your feet.

  • Work out a payment plan. If your income is stable, but you missed a couple mortgage payments or you were unable to pay the full amount of your mortgage for a couple months, your lender may agree to let you pay your arrearage over time according to a written schedule the two of you agree on. If your money troubles are more serious, find out if you qualify for Fannie Mae’s Long-Term or Permanent Hardship Payment Reduction Plan™. If you do, you may be able to reduce your monthly payments by as much as 30% for up to six months, which will buy you time to figure out a permanent solution to your mortgage problem. Other payment plan programs may be available to you depending on who holds your loan. Consult with a housing counselor about your options.

  • Find out if you qualify for a federal HomeSaver Advance™ Loan. This unsecured personal loan is designed to help you avoid foreclosure by helping you wipe out your mortgage arrearage. To be eligible for this kind of loan however, Fannie Mae must own your mortgage and you must have fallen behind on your payments because of a temporary financial problem. Learn more about a HomeSaver Advance Loan.

  • Get a roommate. Depending on your financial situation, the income a roommate pays you and the fact that the two of you will be sharing the cost of utilities may be all you need to make up the difference between the amount of your monthly mortgage payments and what you can afford to pay.

  • Rent out your home and move to some place more affordable. This option makes sense only if your rental income will cover the total cost of your mortgage as well as the monthly cost of your homeowner’s insurance and your property taxes, assuming those expenses are not included in your monthly mortgage payments. Also, you’ll need extra money for any essential repairs you may have to make to your home as a landlord.

Drastic Measures

If you have little or no income and/or if you are under water on your mortgage, then you don’t have many options for avoiding foreclosure and the options you do have are not going to be easy. Those options include:

  • Let someone assume your mortgage, if possible. The person who assumes your loan will become the owner of your home and will be responsible for paying off your loan. Unfortunately however, most mortgages are not assumable. Your loan agreement will tell you if yours is, or you can call your lender to find out.

  • Ask your lender for permission to short sell your home. With a short sale, the lender agrees to let you sell your home for less than what you owe on it and to accept the sales amount as payment in full. Warning! Your lender will report the deficiency (the difference between your outstanding loan balance and what your home sells for) to the IRS and you may have to pay income taxes on that amount, which could create tax problems for you. Therefore, before you agree to a short sale, consult with a tax professional.

  • Give your home back to the lender using a deed in lieu of foreclosure. Your lender may require that you try to sell your home or get it appraised before it will agree to take it back. If you sell your home for less than the outstanding loan balance or if the appraisal shows that your home is worth less than that balance, the lender may require that you pay the deficiency, and if you can’t it may sue you for the money. If you’re considering giving your home back, talk to a real estate attorney first.

  • File for bankruptcy. While bankruptcy won’t usually wipe out your mortgage balance, it could give you time to get caught up on your past due payments or allow to you get rid of other debts, which could give you enough breathing room that you could afford to keep your home. For more information about how bankruptcy might help you, schedule an appointment with a consumer bankruptcy attorney. Your first meeting should be free.

If you need help figuring out what to do, try the free resources available to you:

  • Search HUD for an approved counseling agency, or call 1-888-995-4673 to find the agency closest to you.
  • The Department of Veteran’s Affairs.
  • The Save My Home Hotline. If you belong to a labor union call 1-866-490-5361.
More Resources:

Mary Reed is a personal finance writer who writes about consumer money and legal issues in her own name and also ghost writes books and magazine articles on those topics for clients. To date, she has co-written or ghostwritten 22 books, including Managing Debt for Dummies and Debt Collection Answers: Using Debt Collection Laws to Protect Your Rights. 

Mary also owns MR•PR, a public relations and marketing firm that specializes in providing services to financial planners, consumer law attorneys, bankruptcy attorneys, and authors. Her services include branding, marketing plan development, web site copy, blogs, planning and implementing national public relations campaigns, press kit development, and events planning. 

Read more from Mary Reed »

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