How to Stop Foreclosure and Save Your Home

Forbearance

Seeking forbearance is probably the best way to stop foreclosure and save your home if you can get your lender to agree to it.  With forbearance, you may be able to negotiate a temporary suspension or reduction in the amount of your mortgage payment.  The lender, depending on your circumstances, may also possibly set aside any back payments that are in arrears. 

To get your lender to agree to forbearance, you need to be able to prove that whatever caused your financial difficulty is short term.  An example might be someone who has experienced unexpected medical bills or lost their job, but has now found another one.

Loan Modification

A loan modification is another good way to stop foreclosure and save your home.  A loan modification involves a permanent change in one or more of the terms of your mortgage.  The interest rate is one of the terms that can be modified to lower your monthly payment to one that you can better afford.  A loan modification is also sometimes called a workout or restructure of the loan.

One advantage of a loan modification to help save your home from foreclosure is that there are usually no closing costs.  However, you may have to pay for a new appraisal of your property before your lender will approve a loan modification to stop foreclosure.

Lenders don't like to lower the interest rate and reduce their profit.  But, a loan modification is often preferable over a short sale where the lender may end up losing even more money than if they lower your interest rate.    

Refinancing

If you have sufficient equity in your home, foreclosure help is also available by refinancing.  When you refinance, you essentially pay off your existing mortgage and take out a new one. 

With refinancing, you can often get a lower interest rate and/or get a longer term (the amount of time to repay your loan) to save your house from foreclosure.  That will lower your monthly mortgage payments. On the other hand, if you are already behind in your payments, you will have to convince the lender that you will be able to handle the new mortgage payment amount. 

You will also likely have to pay closing costs if you refinance to avoid foreclosure and save your home.  Closing costs include such things as a loan origination fee, loan discount points, an application/processing fee, and a document preparation fee.  However, lenders vary greatly in how much they charge for closing costs, and some banks and mortgage companies waive closing costs completely.  So it pays to shop around for the best deal.

Short Sale

A short sale will not help you save your home from foreclosure.  A short sale means that your home is sold for less than what you owe and the lender absorbs the loss.  The lender will usually only agree to a short sale when there has been a downturn in the real estate market and property values in your area have dropped.

Another downside of a short sale to stop foreclosure is that you may have to declare the difference between the amount of the short sale and your mortgage balance as income on your taxes.  To be on the safe side, you should check with your tax advisor before agreeing to a short sale so you can then make an informed decision. 

There is also another problem with using a short sale to stop the foreclosure process.  You may still owe the bank or mortgage company some money.  Depending on where you live and the type of loan you have, the lender might be able to pursue a deficiency judgment against you for the shortage between what you owe and the sale price of the property.  So, if you choose to go the route of a short sale, you should negotiate with your lender to accept it as "payment in full" and get the agreement in writing.  Check with your attorney to see if a deficiency judgment would be allowed on a foreclosure in your particular situation.

Deed-in-Lieu-of-Foreclosure

You will not be able to save your home by using a Deed-in-Lieu-of-Foreclosure because you have to sign over all of your rights to your house to the bank or mortgage company.  The lender will then sell your property.

If you have any equity in your property, a Deed-in-Lieu-of-Foreclosure is definitely not a good idea.  If you use a Deed-in-Lieu-of-Foreclosure, you will probably not receive any money left over from the lender's sale of your home if the selling price was more than what was owed on your mortgage.

However, you could possibly avoid a deficiency judgment by using a Deed-in-Lieu-of-Foreclosure if the lender's sale of your property fails to cover what you owe on your mortgage.  Again, it's a good idea to check with your attorney before you proceed.

The most important thing that you can do right now to stop foreclosure and save your home is to call your lender's loss mitigation department. It's time to be totally honest about your situation and ask your lender to work with you.  Ask your lender about forbearance, or a loan modification, or refinancing. 

Try not to get too discouraged if you run into a few road blocks in your effort to stop foreclosure and save your home.  Remember, most lenders do not want to foreclose, since they are in the business of lending money and not selling real estate.  It also is not good for a lender's books if they carry a high ratio of REO (real estate owned.)  However, if your lender will not work with you on forbearance or a loan modification, or refinancing, contact several other lenders for refinancing and choose the best deal.  Persistence often pays off.  As a last resort, consider asking your lender about a short sale or a Deed-in-Lieu-of-Foreclosure.

As a final note, remember that it is a good idea to consult your attorney and a tax professional before you make any decision about how to stop foreclosure and save your home.

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