How to Avoid Foreclosure if You Fall behind on Your Mortgage Payments

The US economy has been a rollercoaster ride since the COVID-19 pandemic began. For many, there has been significant hardship due to job loss or illness, which may have caused them to fall behind on mortgage payments.

The government instituted programs to help homeowners stay out of foreclosure, but those programs are ending. Unfortunately, the economy is now facing high inflation, which erodes borrowers’ earnings considerably, making matters worse for those that fell behind on their mortgages.

According to a recent report from ATTOM, a real estate data company, foreclosures in the US are up 187% from a year ago. This is a reflection of the current economy and the result of the end of homeowner assistance programs from the government to keep people in their homes.

Foreclosures are rising across the nation, with the top three states for the most foreclosures being Illinois, Delaware, and New Jersey.

Steps to Take to Keep Your Home if You Are Facing Foreclosure

1. Get in touch with your loan servicer

Facing economic hardship is emotionally taxing on people, and it is very common just to shut down and avoid facing the hardship they are experiencing. But, unfortunately, this usually just makes matters worse.

As soon as practical, call your loan servicer and tell them about your situation. Even as COVID-19 relief programs are ending, other loss mitigation programs are available at all times.

Mortgage companies are not in the business of owning real estate through foreclosure, so they do everything reasonably possible to avoid foreclosing on homes. 

If you fall behind on your mortgage, you will be given some alternatives to get current. The first option is usually forbearance. This will allow you to skip up to 6 months’ worth of payments without the lender/servicer filing for foreclosure.

It’s important to get into an agreement of some kind as soon as possible. Failure to have a formal agreement with the lender/servicer will force them to file the initial foreclosure documents to protect their interest. You can avoid this by being on a forbearance plan with them; this will buy you time to get your finances in order.

Once the forbearance period has expired, you will be offered a couple of other solutions to bring the amount in arrears current. Usually, the first thing they will offer is a repayment plan where you can make extra payments above and beyond your regular payment until the amount in arrears has been brought current.

Understand that the mortgage company is looking to protect their interest first; they want their money as soon as possible. However, that doesn’t mean they will always act in your best interest, even as they try to help you avoid foreclosure.

You need to be realistic about your ability to pay your regular payment and more on top of that to become current. Unfortunately, many borrowers acting out of good faith and hope, decide to take this option, only to fall behind again due to the extra payments.

2. Ask for a loan modification

Another solution that is available and may not be offered to you right away is a loan modification. Loan modifications are costly to lenders, although not as costly as foreclosing on a home, so they try to avoid that if possible. However, for you, the consumer, this is a much better solution to stay out of foreclosure.

A loan modification on conventional loans will allow you to have the balance in arrears added on top of the loan’s principal balance. Based on your financial situation, you may even have the interest rate reduced and the amortization period extended. This may lower your payment considerably and put you in a much better financial situation.

Government loans such as FHA and VA have additional options for borrowers who fall behind on their mortgages. In addition to a standard loan modification, where the loan is re-structured, FHA and VA offer partial claim payment programs. This allows the lender/servicer to create a 2nd lien for the amount in arrears and allows the borrower to keep making regular mortgage payments. The 2nd lien may have zero interest and zero payments due until you refinance or sell your house.

What to Do if You Can’t Keep Your House

There are cases in which the borrower can simply not resume mortgage payments. This is when you will want to consider how to get out of the situation with the least damage to your credit and finances.

Lenders/Servicers will offer you alternatives to foreclosure that would save them and you from additional hardship. These are the options you may be offered:

1. Sell your home

Due to the favorable real estate market of the last few years, most homeowners have equity in their homes. If you are in a positive equity position, you can work with the lender/servicer to buy time to sell your house and keep the equity you have. They will likely allow you to stay in the home with no mortgage payments until it is sold.

2. Deed in lieu of foreclosure

If you don’t want to deal with selling the home and there is no financial benefit to you to selling it yourself, you can discuss a “Deed In Lieu of Foreclosure.” This allows you to deed the property back to the lender without going through foreclosure. This will reflect better on your credit than being foreclosed on. The lender/servicer may even offer you what is known as “cash for keys”; a small payout so you leave the property in good shape, and they avoid eviction proceedings. It’s a win-win under difficult circumstances.

3. Foreclosure

Lastly, and the one thing everyone wants to avoid, is just letting the legal process of foreclosure take place. Every party in the relationship wants to avoid foreclosure, and it should be a last resort.

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Falling behind on your mortgage is an unsettling event for anyone. It can also be very confusing as you will get not only letters from your lender/servicer but also from companies wanting to help you with legitimate legal services and others not so legitimate.

Contact your lender/servicer first but be cautious about what they offer you for solutions. It may also be wise to consult with an attorney if you are not given solutions to stay in your home.

Whatever you do, do not ignore the situation. Time is your worse enemy when you fall behind on your mortgage, be proactive to find a solution that will be the best option under the circumstances.

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