A beautiful home — complete with a loving family and wonderful memories — is part of the American Dream. A major part of many peoples' lives is spent turning a house into a dream home. But just because you manage to attain the home of your dreams doesn't mean it will be smooth sailing from there on. Your dream home may entail big mortgage payments, which, in a crisis, could put you at risk of foreclosure.
If your home is at risk of foreclosure, the problem must be tackled at once and with the utmost care — one wrong move could spell disaster. However, by taking the proper steps, this disaster can often be averted. (For related reading, see Are You Living Too Close To The Edge?)
Foreclosure Avoidance Tactics
If your home is at risk of foreclosure, don't start packing—take action! Some of the steps you can take to save your house include:
When you are behind on your mortgage payments, reinstatement lets you pay back the amount in lump sum payment (which may include any interest and penalty charges) before a specific date.
In a short refinance, the lender may agree to forgive some part of your debt and refinance the remaining debt into an entirely new loan.
Sometimes, a short-term financial hitch like a medical emergency or a decrease in income may not allow you to make mortgage payments on time. If your lender believes that you have a valid reason behind the missed payments, it may agree to help you out with a special forbearance.
Depending on your financial circumstances, your lender may consent to a repayment in which you will temporarily owe lower payments; you may also get an interim suspension of payments. However, to secure this agreement, you will have to assure your lender that you will resolutely abide by the new repayment plan.
Loan modification allows you to refinance your mortgage loan or even extend the term of your loan. The lender may settle for monthly mortgage payments that are within your financial means. However, to qualify for this alternative, you need to persuade your lender that your monetary problems are only temporary and will soon be resolved.
Refinance with a "Hard Money" Loan
Sometimes your lender may refuse to refinance your loan if it considers you as a high-risk borrower. In this case, you can contact a private lender to refinance with a hard money loan. Hard money loans generally have astronomical interest rates and fees, but it could allow you to buy the time you need to avoid foreclosure.
These foreclosure options should be easily available to anyone with a government-backed loan provider and built-in mortgage insurance, such as in an FHA loan.
When Foreclosure is Inevitable
If your situation makes foreclosure unavoidable, here are some tactics you can use to dampen the financial blow.
If you are absolutely convinced about your deteriorating finances, then the only option left for you is to sell your home for less than the amount required to pay the mortgage loan. You may be eligible for this alternative only if you default on your mortgage payments by a few months, or as specified by your lender. Also, you may be required to sell your home in a specific amount of time.
If you can't bear to move out, you could sell your house to a friend or an investor who will then lease the home to you. The best way to do this is to sign a lease (or contract) that includes an "option to purchase" clause, which gives you the right to buy back your home once your finances have improved. However, this alternative does have significant risks, as sometimes the investor can borrow against your property or may even sell your home without your authorization.
Deed in Place of Foreclosure
Another way out is to willingly give your property to the lender, in which case the lender will pardon your debt. You will qualify for a deed in lieu of foreclosure only if you are unable to sell your home before foreclosure. The only advantage of this option is that you are rescued from a foreclosure as well as a bad credit record. (For more insight, see Consumer Credit Report: What's On It.)
Many people believe that filing for bankruptcy is an excellent solution to foreclosure. In reality, all bankruptcy can do is delay the foreclosure process and buy you some time to catch up on your payments. Once the bankruptcy-instated suspension is revoked, the lender may ask for a full payment, which may require that you apply for a refinancing loan. However, the chances of getting a refinance loan are almost zero at this point, because the bankruptcy declaration will have left you with a negative credit score.
The Bottom Line
Avoiding foreclosure is easy if you stay away from situations that cause it. Excessive debt, adjustable-rate or exotic mortgages, a lack of emergency resources, lack of insurance and even buying costly homes will all increase a homeowner's risk of foreclosure. It is important to scrupulously research the best interest rates available and pick the mortgage term that is right for you. For example, 40-year mortgages will typically allow you to make lower monthly payments than traditional 30-year fixed mortgages. That said, the interest rates for these mortgages tend to be higher. Use a tool like a mortgage calculator to best estimate your total mortgage costs and plan ahead.
Occasionally, financial setbacks can get in the way of making regular mortgage payments. When this happens, the only wise thing to do is to immediately inform your lender about this delay. In most cases, your lender will be willing to cooperate with you and help you catch up. Often, lenders are not interested in foreclosing your house except as a last resort because of the costs and time involved in the process.
As a homeowner, it is up to you to take all the necessary steps to save your house from foreclosure.
To read more on this topic, see Avoiding Foreclosure Scams.