What is a foreclosure?

A foreclosure is when a homeowner is going to lose their home because they stopped making payments on their loan.  Of course there are many reasons someone would stop making payments like job loss/unexpected unemployment, sudden illness, death in the family, divorce, excessive debt or even inability to pay an adjustable interest rate that has increased. Whatever the reason there are somethings to do before your house goes to foreclosure.

Ways to avoid foreclosure.

The best way to avoid foreclosure is to prevent the filing of a Notice of Default. Lenders do not want to foreclose on a home but will file a Notice of Default to protect their interests, if necessary.  If you know that you are unlikely to meet your mortgage obligation, the first thing to do is contact your lender/bank.

Don't put it off, be embarrassed or ignore letters from your lender because those responses will make the matter worse.  Depending on your particular situation and hardship circumstances, here are some options your lender might propose to you.

 • Time to make up your payments

Lenders might agree to wait before taking legal action against you and let you work out a repayment plan that is affordable for you. This is called a forbearance.

 • Forgiving a payment

If you can agree on a way that you will be current after missing a payment or two (without the means to pay it back), the lender might give you a break and waive your obligation. This is called debt forgiveness, and it rarely happens.

Spread out the missed payments over a longer term

For example, if your payment is, say, $1200 a month, the lender might let you add $100 a month to each payment for a year until you are caught up.  This is called a repayment plan.

Changing the terms of your loan

If your mortgage is an adjustable loan, the lender might freeze the interest rate before it increases or change the interest rate to a more manageable rate for you.  A lender might also extend the amortization period.  This is called a note modification.

Add the back payments to your loan balance

If you have sufficient equity and meet the lender's lending guidelines, the lender might increase your loan balance to include the back payments and re-amortize the loan. This is called refinancing.

 • Make a separate loan to you

Certain government loans contain provisions that let borrowers who meet specific criteria apply for another loan, which will pay back the missed payments.  This is called a partial claim.


Ways to Stop Foreclosure.

When the lender files a Notice of Default, your options are limited.  That is why it is better for you to call your lender before falling behind on your payments, because lenders are often reluctant to work out repayment schedules after foreclosure proceedings have been started.

You will be given a certain time period to bring the payments current, pay the costs of filing the foreclosure and stop the foreclosure.  This is called reinstatement of you loan.  If you cannot make up the missed payments and the lender will not work with you, here are a few other options to stop foreclosure:

Sell your home

Interview real estate agents to get an opinion of the market value and DOM (days on market) to sell your home.  You might be tempted to hire a discount broker, but many sellers feel they need the exposure and marketing that full-service brokers offer.  Compare both to determine which best meet your needs and time frame.

• Consider a short sale

If your home is worth less than the amount you owe, you might be a candidate for a short sale. A short sale affects credit but it's not as bad as a foreclosure. You or your agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale.  This is called pre-foreclosure redeemed.

• Sign a Deed-in-Lieu of Foreclosure

This is called deeding the home back to the lender.  The homeowner gives the lender a properly prepared and notarized deed, and the lender forgives the mortgage, effectively canceling the foreclosure action.  Lenders say that deeds-in-lieu of foreclosure still affect credit the same as a foreclosure because the loan was not paid as originally agreed.

The lender might also work an arrangement where a home owner can remain in the home until finding a place to move into.  Owners in default should negotiate the right to retain occupancy, arguing that if the lender followed through on the foreclosure, an owner would still enjoy the right of possession during the procedure.