Ways to Stop Foreclosure Process

February 17, 2016

What Is Foreclosure?

When we take out a mortgage to buy a house, we use the home as collateral for our legal agreement with the mortgage company. In exchange for the money the lender puts up for the home purchase, we agree that we will adhere to certain terms, including a payment schedule. If we fail to abide by the terms, the lender can follow a sequence of legal procedures to sell the home so they can recoup the outstanding amount of the mortgage, plus expenses incurred in the collection process. This legal process is foreclosure.

Missed mortgage payments are the most common reason to be threatened with foreclosure, but other activities that violate your mortgage terms can also result in foreclosure. Though it seems like an easy situation for a homeowner to fall into when facing financial hardship, it is not a desirable state of affairs for the bank, and many lenders will go to great lengths to avoid it. Perhaps most important from the homeowner’s perspective: Foreclosure is not instantaneous. It requires the lender to proceed through a series of steps before the home is sold at auction. In this article, we will discuss what the foreclosure process entails, what you can do to stop it and who can help.

Foreclosure Stages

As we mentioned, foreclosure is not an instant state of being: It proceeds through four or five stages, with everything before auction representing an important pre-foreclosure period when you have many opportunities to stop it. Federal law, state law and your own mortgage documents govern the process, so the foreclosure timeline will vary widely. All told, it can take as little as six months or more than two years from your first missed payment to the foreclosure auction.

Stage One: Missed Payments

In the initial stage, your mortgage payment is due, and you miss it. And then maybe you miss another payment and another. During this period, the bank will likely:

Make contact. According to federal mortgage servicing rules, in most cases, the bank must try to reach you on the phone by day 36 of delinquency and by mail prior to day 45 to explain what you owe and inform you about loss mitigation options. Loss mitigation is industry-speak for solutions to fix your debt with the bank. We will discuss what may be on the table in the next section.
Send scary letters. Later in the missed-payments period, if you haven’t worked it out with your lender you will likely get some version of a breach letter, according to the Department of Housing and Urban Development (HUD) foreclosure timeline. This demand letter oracceleration letter will outline what you owe and give you a period of time to remedy it before the loan is accelerated and a foreclosure is initiated. The “acceleration” part is how the few thousand dollars you may have owed in missed payments becomes the entire balance of the loan.

Those federal rules say lenders must wait until after 120 days of missed payments to begin any foreclosure action on a borrower’s principal residence, with few exceptions. States may stipulate a time period greater than that and particular mortgage documents could have other requirements of the lender before entering the next stage.

Stage Two: Initial Legal Filing or Notice of Default

This stage is when foreclosure is actually initiated: You haven’t lost your home yet, but the requisite documents have been filed to start the process. From this initial filing stage through the auction, state law and your own mortgage documents dictate the process. Foreclosure will follow one of two general paths: judicial or nonjudicial. As to which your lender will use, all states allow judicial foreclosures but it is the standard method in fewer than half. When nonjudicial foreclosure is an option, lenders generally opt for it because it is less expensive and less time-consuming.

Judicial foreclosure: In judicial foreclosure, the lender must prove to a court that it has the right to foreclose on the property. The lender files a lawsuit against you, the homeowner, and you are given the opportunity to raise a defense. The entire process can take anywhere from 30 days to several years to complete, depending on the court calendar, the details of the case and how ambitious you are about engaging with the process.
Nonjudicial foreclosure: In nonjudicial foreclosure, the lender is allowed to start the process outside the court system because your state law and mortgage agreement allows it, and the whole thing is essentially a notification process. A notice is recorded with the county that you have defaulted, and a copy of that notice may be mailed to you and posted elsewhere publicly for a period of time. The notice outlines what you can do to cure the default (pay the lender back or come to agreeable terms), the next action on the part of the lender and how long you have — anywhere from several days to several months — before the next step.

Stage Three: Notice of Sale

A separate notice of sale period occurs with most judicial foreclosures and some nonjudicial foreclosures.

Judicial foreclosure: At this stage, a court has found on behalf of the lender at which point a notice of sale is drawn up and filed with the county that outlines the future date and location of the auction. There are a few states that allow strict foreclosure, in which the title passes to the lender as part of the court’s judgment without a sale, according to HUD’s foreclosure process overview.
Nonjudicial foreclosure: Your failure to cure the default gives the lender the right to hold an auction. In some states, a notice of sale comes after the notice of default period, but others permit a notice of sale at the same time as the notice of default, or even in lieu of it.

If there is an additional period of time before the auction, it is generally a minimum of 14 days. The foreclosure process concludes with the auction.

Stage Four: Auction

An auction is held, with the minimum bid representing the amount owed to the bank plus fees, although occasionally the bidding will start for even less than that amount in order to encourage offers. The home is generally sold to the highest bidder, though in some states the lender gets to approve the winning bid. If the home doesn’t sell, the lender takes possession. If the home sells to a third party, but for less than what you owe, the lender may be able to pursue you for the difference in some states. This is called a deficiency judgment. If the home sells for more than what is owed to the lender and any other lienholders, the balance goes to the homeowner.

Stage Five: Post-Foreclosure

If the lender takes ownership of property at the auction, it becomes a bank-owned or real estate owned (REO) property. The bank will later list it on the open market using a local real estate agent or sell it at an REO liquidation auction.

The Consequences of Foreclosure

Losing your home is not the only consequence of going through a foreclosure. There are tax and credit consequences that can haunt you for a very long time. For example, the IRS considers a foreclosure to be debt forgiveness. This means if you still owed thousands of dollars on your house when it was foreclosed on, the IRS may consider that money “income” and tax you accordingly. Foreclosures also remain on your credit report for more than seven years, and can lower your credit score by as many as 150 points. In addition to lowering your credit score, this can make it difficult to secure housing in the future, even rental housing. Getting a new home loan isn’t impossible after foreclosure, but you may have to wait a long time while you rebuild your credit. And, of course, if you wait too long to leave the home, you might even have to deal with the indignity of watching the local sheriff cart all of your belongings out onto the lawn in front of all of your neighbors.One way to mitigate some of these financial and personal consequences is to sell your house fast before foreclosure. Reputable home buyers are perfectly positioned to help you and may be your best option. To better understand why, you need to understand the Texas foreclosure process. It moves very fast, and you must move quickly, as well, to avoid foreclosure.

How to Stop Foreclosure

Foreclosure is not a foregone conclusion for homeowners in financial difficulty. There are numerous avenues to avoid it, but the important part is to start early. The opportunities available to you will be influenced by where you live, the details of your hardship, your age and other demographics, the balance owed, your mortgage document and terms, the type of lender and more. Important to note: Many of these options will have credit and tax implications and could even increase your debt burden, so it is important to get professional guidance.

Option: Examine Your Finances and Try to Fix Them
Any steps you can make to work out the situation yourself will put you in better stead for negotiations with your lender. Even after the foreclosure process has begun, if you are able to regain your financial footing, you may be able to reinstate your loan, whereby you pay everything overdue plus fees and expenses in a lump payment and resume your normal mortgage terms. Fixing your finances may include:

Getting a second job or some gig work.
Liquidating some assets.
Using insurance if you have a mortgage protection policy or have accrued cash under a whole life insurance policy; or making a hardship withdrawal from a retirement plan.

Option: Sell Your Home
If you don’t see your financial situation improving in the near future, you are likely better off selling your home as soon as possible. For many struggling homeowners behind on mortgage payments, one of the best ways to prevent a foreclosure is to sell the house to a home investor. This helps pay off a mortgage fast.Though handling your mortgage this way still means giving up the home, it helps you avoid other consequences, and you may even walk away with money to start over again. Depending on how much you owe you may have enough money to escape foreclosure and put a deposit and first month’s rent on a new apartment, make a down payment on a new, more manageable mortgage, or even to purchase a small condo or townhouse for cash. Either way, you’ll be far better off than if you allow the foreclosure proceedings to take you all the way to an auction and eviction. When selling to a real estate investor, you should also set realistic expectations for the outcome. Most lived-in homes need work before they’re ready to sell or rent. Take that into account when you receive a cash offer. The investor absorbs those costs, and the company will need to make a profit to remain in business. While home investors can come to your rescue, depending on the severity of your situation, you might not be able to capture all the profit you would if you put the house on the open market and sold to an end buyer.

Option: Loss Mitigation Through Your Lender
Loss mitigation is about finding a solution to pay off debt already incurred and preventing new debt from arising, and ideally, it’s negotiated during the missed-payments period. Banks recognize that the solution to many financial hardships is often just a matter of time to turn things around. Besides, foreclosing is an expensive and often onerous process for the lender. A loss mitigation strategy commonly starts with a written application, but you may be able to make short-term arrangements over the phone. Options could be:

Forbearance: Your mortgage payments are paused for a period of time. It doesn’t eliminate what you owe, it just postpones the collection of that amount. The balance is sometimes deferred until the end of your mortgage or paid back under a repayment plan or loan modification.
A repayment plan: You agree to repay the amount you owe in regular payments over a fixed period of time or the life of the loan.
Restructuring or modifying your loan: The terms of your mortgage are changed to lower the payments. This might be accomplished by lowering your interest rate, extending your term or forgiving some of the principal. The lender may also agree to waive fees and penalties you have incurred.
A deed-in-lieu of foreclosure: You don’t keep your house. Instead, you voluntarily hand the title over to the mortgage company. Some lenders will want the homeowner to try to sell the property first before it will accept. The mark on your credit score with a deed-in-lieu may be less than foreclosure and you’re approved for new home financing quicker, according to mortgage lender Quicken Loans. You may even get a cash payment to assist with relocation costs.

Option: A short sale: You owe more on your mortgage than the market will pay so your lender allows you to sell the property for less than what you owe. If the lender forecloses on your home or accepts a deed-in-lieu, it is going to simply turn around and try to resell it; it may see a short sale as saving time and trouble. To avoid foreclosure with a short sale, you need to start the process early because this type of property transaction can take a long time to complete. Your lender must approve the short sale, and this is where things get sticky. It can take them up to 120 days to make the decision. Unless they decide to halt the foreclosure proceedings, you may not get an approval before your deadline. If you think you might want to do a short sale, start talking to your lender the moment you’re in trouble. The lender may also want you to cover the difference between the sale price and the mortgage.

Option: Bankruptcy
Once you file a bankruptcy petition, federal law prohibits any debt collectors, including your mortgage lender, from continuing collection activities — even if the auction sale has been scheduled. Generally, this option just buys you more time to replace your lost job or recover from a temporary disability; it doesn’t let you off the hook for your debts. Creditors work with you on a reasonable repayment plan so you can keep your loan, or your home is sold to pay the debt.