Bankruptcy

Homeowner's Options When Facing Foreclosure

Your mortgage payment is probably the biggest expense in your family budget. When money is tight and you've cut as much of your other expenses as possible, it still may be hard to make mortgage payments. Missing those payments is a lot more serious than missing most other bill payments.

Once you fall behind on your home mortgage payments, your lender may be ready to foreclose - take your home as payment for the unpaid debt. It's not a hopeless situation, though. You may have some options to help you avoid foreclosure and maybe even keep your home.

Negotiation: Talk to Your Lender

One of your first steps is to try to work out some sort of deal with your lender. Maybe you can get a forbearance where you won't have to make any payments for a short period of time. You may be able to work out a short-term plan with lower monthly payments that fit your budget. It may even offer to change or modify your loan so payments are more affordable.

Explain your situation and why you fell behind - you lost your job, or you had health problems. And be ready to explain how you'll afford full payments in the future - you got a new job, for instance. You may be surprised at how much your lender is willing to help.

Refinance for Better Loan Terms

You may want to try to refinance and replace your old mortgage with a new one. Of course, you want a new mortgage with a lower interest rate, which means a lower monthly payment. Also consider the repayment period. If your current mortgage is for 15 years, a 20- or 30-year mortgage might lower your payments drastically.

Shop around for low interest rates and closing costs. Also, make sure your current mortgage doesn't call for a high prepayment penalty or some other penalty that may make refinancing more expensive for you.

Mortgage Modification

See if you qualify for the federal mortgage relief program. You may be able to refinance your loan or change the terms of your loan. Either way, you may be able to get new and affordable monthly payments.

Walk Away

If you have little equity in the property, if there's no chance you may be held personally liable for any amount still owed on the mortgage after the property is sold in foreclosure (called a deficiency judgment), and if you don't mind the stigma that comes with foreclosure, you might be better off walking away from your home. You simply let the bank foreclose.

Keep in mind, there are serious consequences, even if you're not liable for a deficiency judgment. For example, your credit rating will be damaged seriously.

Deed in Lieu of Foreclosure

To avoid foreclosure, you may ask the creditor to take a deed to the property instead of foreclosing. You lose the house, but your credit rating won't be as hard-hit as it would with a foreclosure. Also, you usually won't be liable for a deficiency judgment if the bank later sells your home for less than what you owed on the mortgage.

However, your bank may not take a deed in lieu of foreclosure if you owe a lot more than the home is worth and there's a good possibility you'll have to pay a deficiency judgment. After all, the bank wants the mortgage paid. It doesn't want to own your house.

Reinstatement of the Defaulted Mortgage

You may have a right to reinstate or cure the default on your mortgage, within a certain period of time after your default. The laws in your state specify the amount of time you have to pay the bank.

Generally, in order to reinstate your mortgage, you must pay the entire amount due on the mortgage when you defaulted - missed payments, late fees, etc. Also, you'll have to pay the bank's costs and expenses in trying to enforce the mortgage, such as court costs and attorney's fees in its foreclosure action.

Equitable Redemption

You have the right to redeem your house at any time after default, but before your home is sold at a foreclosure sale. Generally, in order to redeem the property, you must pay the mortgage in full, plus any damages the bank suffered as a result of your non-payment, such as collection fees, and court costs and attorney's fees in its foreclosure action.

Because you pay off the mortgage, you own the property outright.

Statutory Redemption Is Different

The equitable right to redeem is different from statutory redemption. In most states, you have the right to buy back your home within a certain period of time after a foreclosure sale. Here, you pay whatever price the home sold for at foreclosure. The laws in your state specify how long you have to redeem the property.

Getting a notice of foreclosure in the mail, or just having a gut feeling that foreclosure is coming, isn't the end of the road. Look into your options, and don't wait to ask for help if you need it. An attorney or qualified foreclosure consultant can help ease the stress on you and your family and perhaps help you keep the home you worked so hard to build.

Questions for Your Attorney

  • If I'm behind in my mortgage payments and trying to negotiate to avoid foreclosure, what terms should I try to change?
  • Will a deed in lieu of foreclosure appear on my credit report?
  • Can a bank block my right to equitable or statutory redemption?
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