When you took out your home loan, you gave your lender a mortgage (called a deed of trust in some states). This created a security interest in your house. It gives the lender the right to start foreclosure proceedings if you don't make payments or default. The bank may sell your house to pay off what you owe.
The good news is, banks don't like foreclosures because they're expensive and not fast or easy to do. The bad news is, they won't hesitate to foreclose if they're not given better options.
What to Do First
Chances are, your home loan is only a part of bigger financial problems. Don't stick your head in the sand and wait for more bad news. Develop a game plan to deal with the situation immediately. Your options include:
- Reorganizing, consolidating or even eliminating debts through bankruptcy or credit counseling
- Trying to work out a compromise with your lender
- Selling your home
Talk to a bankruptcy lawyer or someone who professionally counsels people with credit problems. You shouldn't have any trouble setting up a free consultation.
Here is a list of options and factors to think about when deciding what to do:
- What's the extent of your financial crisis - is there a major problem, like a job loss? Or, is paying one debt at the root of your financial problems, like medical bills or your mortgage?
- Is your financial crisis temporary, such as a short period of unemployment or underemployment? Is there a permanent change, like a disability that will affect your long-term earning power?
- How much equity is in your house? Do you owe more than what it's worth?
- How does your home meet your housing needs? What are the ongoing maintenance and ownership costs, and does the location meet your lifestyle, family and employment needs?
- Is home ownership the best way to meet your housing needs? Maybe renting better fits your budget and personal needs
- Have you looked into loan modification?
- Have you tried to sell your home, either through conventional means or through a short sale?
- Do you qualify for Chapter 7 or Chapter 13 bankruptcy relief? Do you have other debts, and could those debts be discharged or restructured through bankruptcy?
Negotiating with Your Lender
Talk to your lender about working out a compromise, such as:
- Different payment terms (lower payments over a longer period of time)
- Forgiving some late payments now in exchange for a longer repayment period
- Lower payments in exchange for a higher interest rate over a longer repayment period
- Refinancing at a lower interest rate (to make payments lower)
Lenders aren't always willing to make a deal. It never hurts to try, though.
Deeds in Lieu of Foreclosure
If you can't reach a compromise, consider offering to give the property back to the lender voluntarily by a deed in lieu of foreclosure. It's sometimes called a deed in lieu of forfeiture, too.
It's a good idea to talk to an attorney to make sure a deed in lieu of foreclosure is right for you and to make sure it gets done properly.
The Foreclosure Process
State laws vary greatly, but the foreclosure process generally involves:
- The lender giving you a written notice of default
- You getting a period of time to pay the missed payments, or cure the default
- The lender electing to proceed with foreclosure
- You getting a notice of foreclosure sale
- A public sale held by auction. The highest bidder can buy your property
- If no one bids enough, the lender may buy the property
- If the lender buys it, it may sell it again by private sale at a later date
- If you haven't vacated the property by the time of the foreclosure sale, an unlawful detainer lawsuit may be filed to evict you
At any point during these proceedings, you usually may keep your home if you pay off the loan and pay any costs or expenses the bank had in the foreclosure process.
You can also stop a foreclosure temporarily by filing bankruptcy. A bankruptcy creates an automatic stay that stops lenders from taking legal or collection actions against you without permission from the bankruptcy court.
Questions for Your Attorney
- Can I bid on my own house at a foreclosure sale? What if my bid is lower than what I owe on the mortgage and I'm the highest bidder?
- Will a short sale have a negative impact on my credit rating? Do I need the bank's permission to make a short sale?
- Can the bank foreclose on our house if my spouse defaults on the mortgage while our divorce action is still pending?