Facing Foreclosure? How to Protect Your Home and Future

For most homeowners, foreclosure remains a very distant possibility throughout the lifetime of their mortgages. While it lingers as a potential outcome, the odds of it impacting them are remarkably slim.

But, for a small minority, foreclosure becomes very real. And very scary.

In this article, we’ll explore what foreclosure is, how it works, and what it means to those who endure it. Most importantly, we’ll also suggest ways in which those who face it might be able to avoid it.

In this article (Skip to...)

• What is foreclosure?
• The foreclosure process
• Types of foreclosure
• Forbearance vs foreclosure
• Fallout foreclosure
• How to avoid foreclosure
• Life after foreclosure

We use the term “lender” in this article to mean the person or entity that owns your mortgage at the time of foreclosure. The vast majority of mortgages are sold after closing with all rights transferring to a new owner. So, the lender that forecloses is unlikely to be the one that set up your loan.

What is foreclosure?

When you sign up for a mortgage, you pledge your home as security — aka collateral — for the loan. In other words, you agree that the lender can seize the home and sell it if you fall too far behind with your payments or otherwise default.

When a home is seized or repossessed, this is called a foreclosure. And the process that must be used to foreclose will depend on:

1. State law where the home is located
2. Federal law
3. The terms contained in your mortgage contract

That means that providing a one-size-fits-all solution in this article isn’t feasible. However, we will provide you with as much information as possible.

The foreclosure process

According to Federal law, you’re unlikely to face foreclosure until you’re 120 days (roughly four months) behind on your monthly mortgage payments.

But there may be exceptions. For example, you may have a shorter time if you’ve clearly already abandoned the home. And that’s especially likely if you’ve returned the keys to the lender and moved out.

Otherwise, after 120 days of skipped or inadequate payments, the time scale you’ll face becomes uncertain. It will depend partly on how keen the owner of your mortgage is to evict you, which will likely be determined by the workload of its foreclosure division. And, if your state allows foreclosures only following a court order, the pace of progress depends on the congestion in your state’s civil courts.

Typically, it’s rare — but far from unknown — for homeowners to be forced out in fewer than 90 days after a foreclosure is triggered. And, in some cases, where the homeowner deploys effective delaying tactics, it can take years.

We're grateful to the legal website NOLO.com as a source for many of the facts in this article. And you may find it helpful, too. But neither you nor we can be sure that everything on that site is correct or current. So, check information with a specialist attorney in your state or research your state's law yourself before relying on NOLO or us.

The different types of foreclosure

Foreclosure comes in various forms, primarily falling into three main categories:

1. Nonjudicial foreclosure — More than half of states allow lenders to repossess a home without going before a judge and getting a court order. However, you may be able to challenge the lender’s decision in court by bringing your own case if you believe it’s based on faulty information or unlawful
2. Nonjudicial foreclosure with homeowner option — Oklahoma and South Dakota allow nonjudicial foreclosures but permit homeowners to retain the right to a court hearing. New Mexico permits nonjudicial foreclosures but these are rarely used in practice
3. Judicial foreclosures — Your state won’t allow foreclosure without a court hearing and order. That gives you a chance to plead your case before a neutral arbiter. And, if you take advantage of that opportunity, it’s likely to delay the time it takes to repossess your home

Where a nonjudicial foreclosure is permitted, your mortgage contract (“the mortgage deed of trust”) may contain a “power of sale” provision. With that, you authorize your lender to seize the property in the event of a default.

Variations

Typically, when a foreclosure process reaches its conclusion, the mortgage holder usually proceeds to sell the home through an auction. It will deduct the mortgage balance and its legal and other costs from the auction’s proceeds.

If you’re lucky, there may be some money due to you after those costs are deducted from the sale price. However, it’s probably more common for you still to owe the mortgage owner. In some states, this becomes the mortgage holder’s concern, while in others, it remains your responsibility.

There are several other variations that can apply in certain states. For example, Connecticut and Vermont have a concept called “strict foreclosure.” There, the mortgage owner can get a judicial foreclosure that permits it to simply assume ownership of the home. It doesn’t have to sell it, but it can still claim against you for any loss.

Besides that, each state has its own laws governing foreclosures that lay down the procedures that must be undertaken. NOLO has a summary of these for each state.

Forbearance vs foreclosure

It may feel as if lenders sit around waiting to pounce on any borrower who gets into financial difficulties. But, usually, the opposite is true.

The foreclosure process is complex and expensive, often resulting in losses for the lender. So, when you are in a rough patch, the lender is typically willing to accommodate you the best way it can.

One way in which it can do so is through a forbearance agreement. With this, the lender agrees not to trigger a foreclosure while the forbearance agreement is in place and being adhered to.

Each forbearance agreement is unique and tailored to the needs of the borrower and lender. It’s intended to give you breathing space to get yourself back on your feet financially. So, it might suspend payments altogether for a period or it might greatly reduce the amount due. And those provisions could cover several months.

This isn’t free money. The deferred payments, along with accrued interest and any associated taxes, will eventually need to be repaid. Sometimes, that means adding the missed months as extra installments at the end of your loan. But you may face a higher monthly payment for a period after the crisis is averted.

Participation in a forbearance agreement is voluntary. It’s crucial to ensure that the help you receive positions you to resume making full payments once the agreement ends. After all, this could be your final opportunity to avoid foreclosure.

Foreclosure fallout

While the ordeal of losing a home to foreclosure is challenging enough, it initiates a chain of events that give rise to a host of further complications.

To start with, your credit score will plummet through a combination of the payments you missed and the foreclosure itself. That means all your future borrowing will be more expensive. And many lenders may not approve your credit applications.

To add to that, you’ll be affected in other ways, too. Your auto and other insurance premiums might climb. You could find it harder to rent a home. You’ll likely have to pay deposits to open accounts for utilities. And many employers now check credit reports before making hiring and promotion decisions.

Moreover, it will probably take you a while to get back on the housing ladder. You can get an FHA loan three years after a foreclosure, and a VA loan after two or three years, assuming you qualify. But, absent compelling extenuating circumstances, you’ll likely have to wait at least seven years to be eligible for other types of mortgages.

So, take any threat of foreclosure exceedingly seriously. And do everything you can to avoid it.

How can you avoid getting foreclosed on?

Foreclosures don’t emerge suddenly; the signs become apparent when payments are missed or fall short. Therefore, you won’t be surprised when your lender starts reaching out to you by phone or mail. It has a legal obligation to do that.

It’s tempting to duck those approaches. But avoid that temptation. Engaging at this point shows you recognize how serious your situation is and encourages the lender to be sympathetic.

When addressing your lender, honesty is paramount. Present your circumstances with a positive yet realistic spin. For instance, you might say, “I’ve been sick but there’s a good chance I’ll be back at work in x weeks.” Or, “I’ve experienced a job loss, and I’m actively pursuing a new position. I feel I’m making real progress and should be earning again soon.”

Those are the sorts of messages that resonate positively with lenders. They demonstrate that you understand your predicament, you’re taking steps to address it, and there’s a good chance things will be back to normal in a reasonable time. Such a stance might position you in line for forbearance.

And your lender may even offer a “short refinance,” which allows you to refinance your mortgage, even though you’re in default, for less than you currently owe. The lender swallows a loss, but it may be smaller than the one it faces by foreclosing. However, if your refinanced mortgage rate is appreciably higher than your original one, you may face affordability issues. So, think this one through carefully.

Other ways to avoid foreclosure

In many places, you have a right to reinstate the loan. That means the foreclosure threat must be lifted if you bring your account up to date by making a lump-sum payment. Sometimes, you can do that just days before your home is set to be auctioned.

You’re also free to redeem your loan (pay off your entire mortgage), which makes the home yours and sidelines the lender.

Nevertheless, for the majority, neither reinstatement nor redemption is a viable option without the financial help of a wealthy relative.

While bankruptcy often invokes a sense of dread, it could stop you from facing foreclosure. And you may well be able to keep your home if you file for Chapter 13 bankruptcy. You might even be able to buy another home before you’re discharged. Still, bankruptcy’s a big step, often demanding a choice between the lesser of two evils.

Note that the Servicemembers Civil Relief Act (SCRA) provides special protections against foreclosure for service members.

Life after foreclosure

We’ve already explored the harsh reality that is the fallout from foreclosure. And there’s no glossing over the severity of those consequences.

But this is a time when an old saying applies: “When the going gets tough, the tough get going.” Rest assured, there are steps you can take to reduce the pain and accelerate your financial recovery.

Here are some strategies:

1. Create a household budget — This lets you take back control of your money and prioritize spending on the things you need and value most
2. Rebuild your credit score — A foreclosure plays havoc with your credit score. However, its impact recedes each month. And you can begin to rebuild your score starting on day one
3. Consult a credit counselor — If you need help, get counseling. But there are many bad players in this business. So, first read a financial regulator’s advice about picking a good one
4. When you’re ready to become a homeowner again, work with a reputable housing counselor. And take local home buyer classes. You may be an old hand at homeownership but you can never have too much knowledge

Most importantly, remember: This, too, will pass. You’ve suffered a major setback. But it’s one from which you can recover — providing you make the effort.

The bottom line

Foreclosure is a serious life event, financially. But it’s not the end of the world.

Of course, it’s best to avoid one. And there’s much you can do to proactively head one off, starting by engaging with your lender early on. Then, seize every opportunity to keep your home.

But, if the worst is looming, consider bankruptcy. That could keep your roof over your and your family’s head.

Despite foreclosure, you might find yourself a homeowner again in as little as two or three years. So begin to strengthen your financial situation as much and as quickly as you can.

If you had a foreclosure some time ago and are now ready to get back on the housing ladder, let us help you find a lender that will offer a competitive mortgage deal for someone in your circumstances.