Nobody buys a home and signs a mortgage agreement with the intent of abandoning their home. However, it can happen when unexpected hard times or financial challenges arise. The absolute most important thing to do in times of distress is to communicate with your mortgage lender. This lays the groundwork for being able to avoid the negative ramifications of foreclosure when possible.
Mortgage lenders are not in the business of owning real estate and would rather not foreclose on your property. Doing so causes a significant hassle, and in many cases, financial loss to the lender. For this reason, lenders are willing to work with struggling borrowers to come to some kind of arrangement.
Even so, it’s important to understand the foreclosure process in case you need to get out of a sticky situation.
The Home Foreclosure Process
The home foreclosure process usually begins with a missed payment to a mortgagee. Typically, 16 days after payment is not received. The mortgage servicer will contact the borrower to determine what is going on, and possibly arrange a new payment structure.
After 30 days, the loan servicer will begin collection attempts, perhaps employing outside agencies. After 90 days, an attorney is usually contacted, and foreclosure legal proceedings are initiated. The foreclosure process can take a while and the borrower can stay in the property until it is sold. The entire process can take several months depending on the state the real estate resides in.
After the foreclosure procedure is initiated, the borrower typically has a short amount of time to bring the loan current. This period is known as the redemption period. If the loan is not made whole by the borrower, the property will go to auction.
If the proceeds of the auction don’t cover the amount due to the lender, it can initiate a deficiency judgment against the debtor for the difference between the amount collected at auction and the remaining loan balance. Obviously, this can present substantial financial challenges to the borrower.
Foreclosure Alternatives
Fortunately, there are alternatives to foreclosure that can limit the financial blow to both the borrower and the lender. Here are a few options which are typically presented by lenders in times of delinquency in order to avoid foreclosure:
Repayment Plan
When borrowers can’t make a mortgage payment due to an unforeseen expense such as an urgent medical procedure but still have the capacity to make payments in the future, a repayment plan may be offered by the lender. A repayment plan allows borrowers to overpay for the next few months in order to get caught up on the mortgage.
Loan Modification
A modification of the terms of the loan can help if a borrower is having trouble with the current agreement. This is typically done by extending the length of the loan or lowering the interest rate to reduce the monthly payment. These loan modifications can save a borrower from foreclosure, so long as the updated payment terms are met.
Short Sale
A real estate short sale is when the lender agrees to allow a borrower to sell the home for less than the outstanding balance due and forgive the remaining balance. This allows the homeowner to avoid foreclosure, and the lender realizes cash flow without foreclosing on the home.
When debt is forgiven by the lender it may be considered taxable income. Borrowers should consult with a tax advisor to understand the consequences of a short sale before taking this route. It can leave borrowers with a huge financial tax burden they didn’t expect.
Final Thoughts on How to Avoid Foreclosure
Each of these options is available at the discretion of the lender. Not all of them are viable solutions for all homeowners who are struggling to keep up with mortgage payments. If you are having trouble making your monthly mortgage payment, the best thing you can do is get in contact with the lender as soon as possible to discuss your options.
