Avoid or delay foreclosure with short sales, deeds in lieu of foreclosure, bankruptcy, and other tactics.
Q: Will my bank negotiate with me or lower my rate so I can avoid foreclosure?
A: Your lender may modify your loan if you have an adjustable rate mortgage or if you are several months behind on your mortgage. Call and ask to speak to your lender’s loan modification or loss mitigation department. The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to modify the terms of your loan.
There are several plans offered by the federal government to help homeowners avoid foreclosures, including FHASecure and Hope for Homeowners. The most recent program to be announced is the Homeowner Affordability and Stability Plan, which is aimed at helping homeowners refinance their mortgages to lower their mortgage payments. Homeowners might qualify for a refinance at a 15- or 30-year fixed-market-interest-rate (currently around 5%).
This plan would ease the rules so that homeowners whose loans are owned or guaranteed by the Fannie Mae and Freddie Mac could have a chance to refinance even if they have little or no equity in their home. A separate part of the plan would bring mortgage payments down for some homeowners to a total of 31% of their gross income. Both parts of the plan would apply only to homeowners with conforming loans.
Q: Can I sell my house for less than I owe on my mortgage (short sale)?
A: If the sales price you are offered falls short of the amount you owe the lender — called a “short sale” — you need to get permission from your lender. This is because in most states, technically a lender is allowed to sue you after the house is sold (or foreclosed on) to recover any remaining deficiency — the difference between the sales price and what you owe on the mortgage. In most cases, however, a lender is not likely to sue for a deficiency.
If you live in a state that doesn’t allow a lender to sue you for a deficiency, you don’t need to arrange for a short sale. In this case, if the sale proceeds fall short of your loan, the lender can’t do anything about it.
Short sales usually aren’t possible if there is a second mortgage, unless the same lender owns both loans. Also, some homeowners may be better off letting a foreclosure take place, saving a few month’s mortgage payments until it happens.
Q: Can bankruptcy stop a foreclosure?
A: Bankruptcy can delay a foreclosure, but won’t stop it permanently. Here’s how it works: When you file bankruptcy, the court automatically issues an “automatic stay.” The automatic stay directs your creditors to cease all collection activities and foreclosures immediately. If your home is scheduled for a foreclosure sale, the sale will be postponed while the bankruptcy is pending — typically for three to four months.
However, if your lender obtains the bankruptcy court’s permission to proceed with the sale (by filing a “motion to lift the stay”), the sale may be allowed to go forward after a couple of months. But during a Chapter 7 bankruptcy, you can live in your home for free for several months while your bankruptcy is pending. You can then use that money to help secure new shelter.
If you’re having trouble making your mortgage payments or already in jeopardy of foreclosure, see Nolo’s Bankruptcy and Foreclosure Blog or the bestselling Foreclosure Survival Guide, now available online at no charge. Both are written by practicing attorney Stephen R. Elias, president of the National Bankruptcy Law Project.
Q: What is a deed in lieu of foreclosure?
A: With a deed in lieu of foreclosure, you give your home to the lender (the “deed”), and in exchange, the lender cancels the loan rather than foreclosing on the property. In most states, a lender is allowed to sue you to recover any remaining deficiency—the difference between what the lender can sell the house for and what you owed on the mortgage. Before you agree to a deed in lieu of foreclosure, make sure that the lender agrees, in writing, to forgive any deficiency that exists. Deeds in lieu of foreclosure are not possible if there is a second mortgage, unless the same lender owns both loans.
Q: What happens to renters when a property is foreclosed on?
A: Most renters will lose their leases upon foreclosure. The rule in most states is that if the mortgage was recorded before the lease was signed, the lease will be wiped out when a foreclosure occurs. That doesn’t mean a renter will have to leave immediately — but those who remain in the rental join the ranks of month-to-month renters, all of whom can be terminated with proper notice — usually 30 days, but 60 days in California. The new owner (usually the lender) may or may not move quickly to terminate the rental.
Q: Are there foreclosure protections for military personnel?
A: A mortgage lender can’t foreclose on a house owned by military personnel on active duty unless the lender seeks special permission from the court.
