Stop Foreclosure!

What you should do

1. Make a budget

   Sketch out a spending plan for the next several months, including expected income and expenses.  See what costs you can trim to free up as much money as possible for home payments.  You may need to pay the minimums, or even less, on other debts. In certain very limited circumstances -- such as when you are absolutely sure your financial hardship will be short-lived -- it may make sense to skip payments on some bills so you can pay your mortgage.  Read “How to not pay your bills” to learn about the consequences that may follow.  Another option: borrowing money from friends or family, or tapping retirement funds.  Do the latter only if you’re convinced you can make future payments;  you don’t want to drain your retirement funds if you’re only going to end up losing the house.

2. Consider getting help

   Legitimate credit counseling services, those associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies, typically have housing counselors that can help you evaluate your options.  Or you can find a housing counseling agency approved by the Housing and Urban Development Department by calling (800) 569-4287.  If you have a Veterans Administration loan, you can call (800) 827-1000 to get a referral to a financial counselor.

3. Check your refinance options

   If you have equity in your home, your credit rating is relatively intact and your lender hasn’t yet filed a notice of default, you may be able to get another loan with more affordable payments.  An experienced mortgage broker, preferably one affiliated with the National Association of Mortgage Brokers, can let you know your options.  Be cautious about jumping into another risky loan, though: adjustable, interest-only or “option” mortgages might just put off the day of reckoning and you could find yourself facing even higher payments down the road.

4. Be realistic

   Many times people struggle to hang on to a house that they simply can’t afford when they’d be far better off without it. That may seem harsh, but it’s far better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure. You may also want to consider your Rental Options.

5. Get organized

   If you are going to try for a loan modification, you’ll need to prepare a small mound of documentation.  The lender will specify what it wants, but typically you’ll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a “hardship letter” that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.
6. You may also want (or be required) to provide a market analysis of your house to document how much equity you have in your home.  A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell.

Leaving home?

1. Sell the house

   If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You’ll preserve what’s left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future.

2. Offer a deed in lieu of foreclosure

   If you can’t sell the house for what you owe, but you’re not deeply “upside down” on your mortgage, this may be an option: you propose handing over the deed to your home and your lender agrees to release you from your mortgage.  This usually keeps you from having to pay any deficit that might be owed on the property, while the lender avoids further legal costs related to a foreclosure.
3. Lenders can’t be forced to accept a deed, however.  Typically, lenders require that the borrower make “a really good effort” to sell the home first and show that their delinquency was due to “unavoidable hardship” before they’ll agree to a deed in lieu of foreclosure.

4. Negotiate a short sale

   If you owe substantially more on your home than it’s worth, you may be able to get the lender to accept less than it is owed by negotiating a “short sale.”  You essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit.

5. Allow the foreclosure to proceed

   This is generally the worst choice.  In some states and in some circumstances, the lender can even go after you in court for any deficit between what the house eventually sells for and what you owe.  An attorney or housing counselor can let you know if that’s a possibility.