Avoiding Foreclosure: A Guide

If you fail to make mortgage payments for an extended period, your lender may take control of the property and sell it. However, throughout the foreclosure process, you will still have the opportunity to catch up on payments or make alternative arrangements to keep your home. Eventually, though, you may be evicted.

FICO reports that foreclosure can decrease your credit score by over 100 points, making it challenging to purchase another home. Hence, it's crucial to contact your lender before falling behind on payments.

CNBC Select provides a comprehensive guide to the foreclosure process, including the various types of foreclosure and strategies for preventing it.

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Types of foreclosures

The three types of foreclosure vary based on location and the terms of the mortgage contract.

Judicial foreclosure

A borrower who has fallen behind on mortgage payments for at least 120 days may face foreclosure, during which the lender must sue to reclaim the house and sell it.

In some situations, close to half of the U.S. states allow for judicial foreclosure as an option.

Non-judicial foreclosure

In some U.S. states, a mortgage lender can seize a property without a court order in a non-judicial foreclosure, but only if a power-of-sale clause was included in the mortgage or deed of trust.

Lenders often prefer non-judicial foreclosures because they are less expensive and quicker than judicial foreclosures.

Strict foreclosure

In a strict foreclosure, the borrower is not required to surrender their home. Instead, a judge orders them to pay off their mortgage by a specific date. If they do not comply, the lender acquires ownership of the property.

Vermont and Connecticut are the only states with strict foreclosure rules, which are rarely used.

The foreclosure process

The duration of foreclosure can range from several months to several years, depending on the state and type of proceedings.

Late payment periods (1-2 months of non-payments)

If you've missed a few mortgage payments, your lender may contact you to request payment and may be willing to work with you on a solution, such as accepting a partial payment, according to the US Department of Housing and Urban Development (HUD).

Demand letter (3 months)

If you haven't made a payment after 90 days, your lender may send you a "demand letter," which is a form that shows how behind you are and gives you 30 more days to catch up. You can still work with your lender or a housing counselor to find a solution, but if you don't act, formal foreclosure proceedings may start.

Notice of default (4 months)

If you fail to make payments within the additional 30-day period, your lender may file a public notice with a state court stating your delinquency.

Notice of sale

If a lender decides to repossess and sell a property, they will send a letter and place a notice on the front door with information about the sale. In many instances, this is the final chance to collaborate with the lender to prevent losing your home.

Date of sale

When the home is sold at auction and the proceeds are less than the amount owed on the mortgage, some states allow the lender to demand payment of the remaining balance.

Redemption period

If your home has been sold at auction, you may still have the option to reclaim it if you can pay the outstanding balance and additional costs incurred during the foreclosure process. The length of the redemption period and its availability vary depending on whether the foreclosure is judicial or non-judicial, according to HUD.

Verify with your state government about the existence of a redemption period, judicial or non-judicial foreclosures, and other details regarding foreclosure laws.

Eviction

You must be given at least 90 days to vacate the property following the foreclosure sale.

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How to avoid foreclosure

Early intervention is key to preventing foreclosure.

Talk to your mortgage lender

Contact your lender immediately if you anticipate difficulty in making mortgage payments and explore potential solutions to prevent foreclosure.

You can connect with housing counselors through HUD for advice on your housing options.

Mortgage repayment plan

If you've fallen behind on payments due to a temporary setback, your lender may offer a structured plan to help you catch up, but there may be additional fees and interest.

If you're behind on your mortgage payments because of unpaid debts, a debt settlement company may not be able to help you. However, if you owe at least $7,500 in unsecured debts such as credit card bills, medical bills, and personal loans, National Debt Relief could potentially assist you in negotiating a settlement with your creditors. The company has an A+ rating from the Better Business Bureau and claims that, after factoring in their fees, clients saved an average of nearly 25% in 2022.

FDR, founded in 2002, specializes in reducing credit card debt and has helped over a million clients resolve over $18 billion in unsecured debt.

Forbearance

A temporary reduction in your required payments may be granted if you demonstrate financial hardship, such as job loss or major illness, as per the Consumer Financial Protection Bureau.

Not extending forbearance for up to 12 or 18 months can negatively impact your credit score, although not as severely as foreclosure, according to the U.S. Public Interest Research Group.

Loan modification

Modifying your mortgage terms through a loan agreement may allow you to pay off your loan in smaller installments over an extended period or have a portion of your loan forgiven, if approved by your lender.

Partial claim

An interest-free loan from HUD, known as a partial claim, can be used as a one-time payment to bring your mortgage current and prevent foreclosure. The loan can cover up to 30% of your unpaid principal, but you must be between four and 12 months delinquent and demonstrate that you have the ability to make regular monthly payments.

If you want to sell or refinance the property, you must first repay the partial claim.

Deed-in-lieu agreement

Transferring ownership of the property to your lender in exchange for mortgage forgiveness through a deed-in-lieu of foreclosure agreement relieves your financial burden and simplifies the process for the lender to acquire the property.

If a mortgage is underwater, some borrowers opt for a deed-in-lieu agreement, which means they surrender the property to the lender in exchange for the release of the mortgage. This option results in the loss of any existing equity in the property and may also trigger tax liability on the forgiven loan balance.

Short refinance

If a lender approves a mortgage loan refinance for a lower amount, the remaining debt is often forgiven.

Home sale/short sale

Choosing to sell your home can be a difficult decision, but it safeguards your credit and prevents the possibility of home repossession.

Your lender may permit you to execute a short sale, wherein you sell your house for less than the remaining mortgage balance. The lender will then accept the discounted sale price as full payment and release you from the remaining debt.

Bottom line

To prevent foreclosure, it's crucial to communicate with your lender promptly when you fall behind on mortgage payments. You may be able to avoid foreclosure through forbearance, loan modification, or selling your property.

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