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5 Steps to Stopping Foreclosure

Step 4: assess your options

Whether you're already behind in your payments, or you think that you might run into financial trouble soon, you need to act now!

This page:

  • Explains what your options are

  • Helps you understand your position based on the your equity

  • Explains when and why it's worth it to save your home

If you missed it, steps 1-3 of this five-step stopping foreclosure plan explains what you should do right away if you're in financial trouble. Step five helps you understand your lender's position

Step four: asses your options

Your options depend a lot upon the nature of your problems. If your difficulties are temporary, your lender may be willing to offer you a repayment plan or loan modification. If they are long-term, you may need to consider a more serious course of action.

Short-term difficulties

If you will be missing only a few months worth of payments, your lender may be able spread the owed amount over a year of future payments. This is called a repayment plan. It's a pretty good deal for you, but you will also be held responsible for any legal fees the lender has incurred over your case. (Another good reason to involve your lender early on!)

This method results in higher payments, but it's relatively fast and easy. That's why it's an ideal plan for homeowners with a steady income who have recently incurred some large and unexpected expense like major car repairs.

If you can't afford higher monthly payments, your lender may be willing to modify the terms of your loan to help you pay it back. They can do this by lengthening the amortization schedule or by rolling the past-due balance into the loan and re-amortizing. This option is more expensive in the long run, but is good for homeowners experiencing a temporary loss of employment.

Finally, if you can get a quick loan from a private source (like a relative) for the amount in arrears, your lender will probably be willing to go back to "business as usual" under your original mortgage terms.

Permanent difficulties.

If your financial troubles are more serious, you still have options. Unfortunately, unless your lender is very flexible and you can maintain a pretty high level of payment, permanent financial problems usually result in having to sell your home. At this point, your aims should be to make the transition as smooth and inexpensive as possible and to save your credit reputation.

How you manage this process depends a lot on the equity you've built in your home. If it's high, you need to concentrate on protecting your investment. If it's low, minimizing the out-of-pocket expense should be your primary concern.

Your lender may agree to help you sell your home in a pre-foreclosure sale. This is a very good option for homeowners with a lot of equity, because it protects a big part of your investment. After foreclosure, a lender is entitled to reimbursement for the loan principal, interest, and legal fees. This can take a big chunk out of the resell value. If you've built a lot of equity, it's better to sell it yourself as fast as possible.

If you can't manage to resell before foreclosure, consider refinancing with a "hard money" loan. These are short-term loans that finance your monthly mortgage payments and give you extra time to sell your house. The interest rate and fees on these loans can be pretty high, but you'll still save big over a foreclosure.

If you haven't built much equity and you and your lender can't agree on a repayment program, (or you would rather sell anyway) you can probably still reach some kind of arrangement with your lender. In fact, lenders like to avoid foreclosure in low-equity situation, because it's often difficult for them to recoup the cost.

If you have very little equity, your lender may be able to offer you a "short sale" or "deed in lieu of foreclosure". In a short sale, the lender sells the house, keeps the proceeds, and forgives the loan difference. If you'd like to keep your home, you may even be able to get a "short refinance" into a new loan with the lender forgiving the difference. The "deed-in-lieu" is similar. You surrender the deed to the lender and they resell your home without foreclosing.

Not having a lot of equity can actually be a good bargaining chip because the lender has little to gain from foreclosing. You should be able to restructure your loan or resell at a small loss.

Next: Step 5: understanding your lender's position.

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