No event is more devastating to a property owner than foreclosure. In addition to losing the property and all the equity you built, yourself and your possessions put out on the street and your credit destroyed, you could be hit with a deficiency judgement, your wages garnished, your other property attached.
It’s worth avoiding at all costs, but there are different ways to go about putting a stop to it … and not all of them are equally effective, and sometimes the cure is nearly as bad as the disease. Here are the different ways people attempt to stop foreclosure—the good and the bad, the useless and the effective.
One of the most effective ways to stop a foreclosure is to pay the loan off in cash. Even if a lender has sunk great expense into the proceedings, a payoff of the loan in cash is usually their best-case scenario. They will probably stop the foreclosure and you get to keep the house.
Of course, most people with enough cash to pay off their loan in full don’t fall so far behind as to risk foreclosure. When a property owner has a lot of equity, however, they may be able to raise cash, secure credit, or otherwise scrape together the money to pay off the loan, including arrears and late penalties.
A borrower may not be able to pay the loan in full, but if they can raise the money or obtain credit to pay the arrears, most lenders will stop the foreclosure. Again, the borrower gets to keep the property.
If the borrower can remain current on loan payments after paying off the arrears, the worst may be over. However, if the borrower falls behind again, new foreclosure proceedings may start, or the old foreclosure proceedings may restart.
Many lenders will accept a deed in lieu of foreclosure, sometimes shortened to “deed in lieu.” In this circumstance, the borrower signs over the property deed to the lender voluntarily, in exchange for which the lender halts the foreclosure. Many lenders agree to this because they incur expenses in foreclosing a property and would prefer to settle the dispute out of court.
Of course, this outcome ends with the borrower losing the property. However, it heads off the credit damage and the possible deficiency judgement that comes with foreclosure. It’s a chance for a fresh start.
A short sale is an agreement with your lender where you will sell the property and settle the loan for less than the payoff balance. Most lenders have a cutoff number where they will agree to a short sale. Opening short sale negotiations with your lender usually halts foreclosure proceedings.
Short sales result in the borrower losing the property and any equity, as well as incurring a blemish on their credit. However, it’s better than the blemish of a foreclosure or deficiency judgment.
Filing for bankruptcy triggers a stay of foreclosure. Depending on the type of filing, this might be temporary or permanent. Chapter 7 bankruptcy only temporarily stays the foreclosure until the case closes, usually four to six months after the filing.
Chapter 13 filings are a more permanent fix, allowing the borrower to fold the mortgage into a three-to-five year repayment plan to bring the mortgage up to date. If you can’t afford the repayment plan plus your normal mortgage payment, however, the foreclosure clock starts again.
Bankruptcy is bad for your credit, but not as bad a foreclosure or deficiency judgement. It’s worth noting that if you wait too long to file, either out of procrastination or denial or any other reason, it may be too late to stop the foreclosure.
A temporary restraining order (TRO) can stop a foreclosure, but the lender will almost always file a motion to have the TRO lifted and the motions are almost always granted. This might buy the borrower a few days, but not much more.
A “short refinance” is a refinance of the loan into a smaller loan, entailing some measure of debt and arrears forgiveness. Especially early in the process, before the lender has sunk time and money into foreclosure proceedings, this may be more appealing to the lender than slogging through a foreclosure proceeding.
Best of all, the borrower gets to keep the property with a lower payment … assuming the borrower can afford the new payment.
The borrower may be able to refinance into a new loan, if they can secure a loan big enough to settle the current loan including arrears and late fees. This is probably only possible if the borrower has a lot of equity. If the borrower faces foreclosure due to a recent spate of late or missed payments, it may be hard to find a lender willing to stake them. However, private lenders or government programs might be an option.
Under the Home Affordable Modification Program (HAMP), borrowers with FHA loans can stop a foreclosure by availing themselves of a partial FHA insurance claim. This an interest-free subordinate mortgage which is not due until the first mortgage is paid off. The proceeds of the subordinate mortgage reinstates the delinquent loan. HUD is also authorized under HAMP to modify the loan to make the payment affordable for the borrower.
Loan modifications are attractive to many lenders who want to avoid the pain of a foreclosure proceeding … but only 20% of borrowers apply for them, usually because they wait too long to start the process or choose not to keep open lines of communication with the lender. However, by starting early and maintaining a good relationship with a lender, a borrower may be able to keep the property with a modified loan at a lower balance and/or payment.
If the inability to make mortgage payments was temporary and the borrower is able to make bigger payments, many lenders will agree to a repayment plan to bring the loan current with larger payments over a course of three, six, or twelve months. It’s better for the borrower’s credit, the lender is made whole, and the borrower gets to keep the property.
A lender may agree to a forbearance agreement if the borrower can provide sufficient evidence that the delinquency is part of temporary circumstances. Under the agreement, the lender agrees to postpone payment obligations until a later date, after which arrears are due in the form of larger payments over a three, six, or twelve-month repayment plan. Alternately, the forborne payments may be added to the principal balance.
A forbearance agreement is more likely to work early in the game, before a severe delinquency has transpired and foreclosure is even on the table. A borrower who is severely delinquent is unlikely to convince a lender that they can resume payments in the near future.