In 2017, more than 676,500 American homes went into foreclosure, according to Attom Data Solutions. That’s roughly 1 out of every 200 homes in the country. This is better than the peak rate in 2010 when more than 2 out of every 100 homes were in foreclosure, but it still represents hundreds of thousands of people being forced out of their homes because they couldn’t meet their mortgage payments.
Homeowners can end up in this situation for many different reasons. Some lose their jobs and can no longer make ends meet. For others, a health crisis leaves them with hefty medical bills that eat up their available funds. And some simply make the mistake of buying more house than they can afford, so that even a small change in their finances is enough to put the payments out of their reach.
No matter why it happens, foreclosure is a terrible experience. Losing your home is always scary and depressing, but when you lose it because you couldn’t meet the payments, you can feel like it’s your fault. This piles feelings of shame and guilt on top of all your other stress. And to make matters worse, a foreclosure seriously hurts your credit score, making it much harder for you to buy another home in the future.
If you’re facing this problem, it makes sense to do everything you possibly can to avoid it. There are several ways for cash-strapped homeowners to prevent a foreclosure — or at least shield themselves from some of foreclosure’s worst effects.
Raising Extra Cash
If you haven’t fallen behind on your mortgage payments by more than a month or two, you still have a chance to get back on track. If you can manage to raise enough extra cash, you can make up the missed payments and save your home from foreclosure.
Here are some ways to raise money in a hurry.
Slash Your Expenses
Start by cutting out all the extras in your budget, if you haven’t already. Cancel your cable TV, scale back to a cheaper cell phone plan, drop your gym membership, stop drinking bottled water, and quit going out to eat, even if it’s just for coffee in the morning.
If that’s not enough to close the gap in your budget, it’s time to move on to more extreme strategies. Look for ways to slash your grocery bills, find affordable healthcare, and possibly even give up your car. Tightening your belt this much is painful, but it’s better than losing your home.
Use Aid Programs
If you qualify for any form of government aid – such as Medicaid, SNAP (food stamps), or heating assistance – take it. The extra money it frees up in your budget could allow you to keep up with your mortgage. The Benefit Finder at Benefits.gov can help you find and apply for programs in your state.
Search your house for anything of value that you can sell to raise some money. High-value items include jewelry, electronics, collectibles, tools, musical instruments, and even some furniture or a second car if you can get along without them. You can sell your belongings on eBay, post them on Craigslist, or take them to a pawn shop.
Boost Your Income
Look for ways to earn some extra income to make ends meet. See if your boss is willing to give you some extra shifts or overtime hours at work. If that doesn’t work, look into getting a second job or a side gig like driving for Uber. Renting out a spare room in your home, if you have one, is another way to bring in some extra money.
Tap Your Retirement Fund
If you have money set aside in a retirement fund, consider taking an early withdrawal. If you have a Roth IRA, you can withdraw money from it without having to pay extra taxes or penalties. Doing this will still put you behind on your retirement savings, but you can worry about catching up later, once your financial crisis has passed.
If you have a traditional IRA or 401k, you’ll have to pay taxes and penalties on any early withdrawals, but the cost could be worth it to save your home.
Some people wind up in trouble because of adjustable rate mortgages that have a low, manageable payment for the first few years, then suddenly jump up to a level that’s out of reach. Some of the worst offenders are interest-only loans, which become much more expensive when you have to start paying principal as well as interest. Other people have fixed-rate mortgages, but the interest rate is very high – perhaps because they had poor credit, or perhaps because the rates just happened to be high at the time.
If you’re in any of these situations, refinancing your mortgage could be enough to get your monthly payment down to a level you can handle. This can be an option even if you’re upside down on your loan. Ordinarily, banks don’t want to refinance a mortgage unless you have a fair amount of equity, but if the alternative is foreclosing on the loan, the bank can make more money by letting you refinance than by going through the foreclosure process.
Refinancing vs. Foreclosure
Refinancing your home loan, if you can, is usually the best alternative to foreclosure. It offers several advantages:
- Least Impact on Credit. Applying for a new loan always dings your credit score a bit, but the drop is only temporary. Compared to other options – such as a short sale, loan modification, or deed in lieu of foreclosure – a refinance should do the least damage to your credit rating in the long term.
- A More Affordable Loan. Refinancing your home replaces an unaffordable loan with an affordable one. You’ll have monthly payments that fit more comfortably into your budget, rather than stretching it to the limit or beyond.
- You Keep Your Home. Most importantly, refinancing lets you keep your home. You’ll have to go through some hassles filling out the paperwork, but that’s a lot less trouble than moving to a new home.
Ways to Refinance
If you’ve built up plenty of equity in your home, your bank should be happy to refinance your mortgage for you. Even if you can’t get a lower interest rate, you should be able to lower your monthly payments by extending your loan term.
For instance, if you had a $200,000 loan and you’ve already paid off $50,000, you can take out a new 30-year loan for $150,000. It will take you longer to get your house paid off this way, but that’s better than losing your home completely.
If you don’t have much equity, there’s a chance you can still refinance with the help of some special programs. These include:
- HARP. The Home Affordable Refinance Program (HARP) helps homeowners whose homes have lost value to refinance their mortgages, even if they’re now upside down. This program is only available for mortgages that were originated up through May 2009 by the government-sponsored programs Fannie Mae or Freddie Mac. The HARP website can tell you if you qualify and help you apply. HARP is due to expire at the end of 2018, so you’ll need to act quickly to use this program.
- FHA Programs. If your mortgage is backed by the Federal Housing Authority (FHA), you can take advantage of some special FHA programs for refinancing. An FHA Simple Refinance is a good option to get the lowest possible interest rate and keep your out-of-pocket costs low, while an FHA Streamline Refinance helps you refinance quickly and avoid paperwork.
- IRRRL. Homeowners with a mortgage financed by the Department of Veterans Affairs, or VA, can qualify for an Interest Rate Reduction Refinancing Loan (IRRRL). Sometimes referred to as a VA Streamline or VA-to-VA loan, this loan helps you refinance to a lower interest rate. Any lender can provide this type of loan, but no lender is required to, so you might have to shop around to find a bank that will provide this loan to you.
If you can’t refinance your home loan, you can try to get your lender to agree to a “mortgage workout.” This sounds like an exercise plan for your house, but it’s actually a plan that helps you “work out” a way to make your mortgage more manageable. There are several types of mortgage workouts, including loan modifications, forbearance plans, and repayment plans.
With a loan modification, your lender agrees to alter the terms of your mortgage to make the payments more affordable. For instance, the lender could reduce the interest rate, change your loan from adjustable-rate to fixed-rate, or extend the term of the loan. One advantage of loan modifications is that applying for one temporarily halts the foreclosure process, giving you more time to save your home.
To be eligible for a loan modification, you must show that you’ve suffered a financial hardship and can no longer meet your current loan payments. To prove this, you must provide documents such as paychecks, tax returns, and bank statements. You must also go through a trial period to show that you can afford to make the new, lower payments.
There are many different loan modification programs. The Hardest Hit Fund (HHF), which provides home loan modifications and other aid to struggling homeowners, is available in 18 states and the District of Columbia through the end of 2020. There are special loan modification programs available for VA and FHA loans, as well as programs run by banks.
To apply for a loan modification, contact your lender’s loss mitigation department (also known as a home retention department). You should be able to find contact information for this department on your monthly mortgage statement or on the lender’s website. The Making Home Affordable (MHA) website has more information about what you’ll need to apply.
In some cases, the financial crisis that’s putting your mortgage payment out of your reach is only temporary. For instance, maybe you’ve lost your job, but you know you’ll be starting a new one in a few months. Or maybe you have health problems that have left you temporarily unable to work.
In a situation like this, a forbearance agreement can help you until you get back on your feet. Under these plans, the mortgage lender agrees to reduce, or even suspend, your mortgage payment for a set amount of time. They also promise not to foreclose on the property during this period. In exchange, you agree to resume paying your mortgage in full once the period is up, as well as paying extra to catch up on the missed payments.
The process for seeking loan forbearance starts out the same way as getting a loan modification: contact your lender and ask them to help you set up a plan. Just remember that forbearance is only a temporary solution. It won’t help you stay in a home you can’t afford.
Perhaps you’re at risk of foreclosure because you missed several mortgage payments during a short-term crisis, but you’re now back on your feet and meeting the payments again. In this case, a repayment plan offers you a way to get caught up and avoid foreclosure.
In a repayment plan, your lender adds up all the payments you’ve missed, then divides the total into small chunks that are added to your regular mortgage payment over a fixed period. For instance, if you’re behind by $3,000, you could add an extra $500 to each mortgage payment for the next six months. The length of the repayment period varies, but three to six months is typical.
If you just can’t afford your home anymore, your best option could be to sell it. The problem is that if housing prices have dropped, the amount your home will fetch on the market could be less than the amount you owe on your mortgage, leaving you still in the red. In a case like this, a short sale – selling your home for less than the amount you have left on the mortgage – could be the solution. If your lender agrees to it, you can sell your house, walk away, and start over.
For instance, suppose you currently owe $100,000 on your mortgage. To pay off this amount and also cover your closing costs on the sale, you’d have to list the house for $105,000. However, the housing market in your area is so cold that you get no offers at this price.
With a short sale, you could drop the asking price for the house to $95,000. With $5,000 for closing costs, that leaves only $90,000 to pay off your old mortgage. However, the lender agrees to accept this smaller amount as full payment for your loan rather than go through the expensive, time-consuming process of foreclosing on the home. Some lenders actually require you to try a short sale before they’ll consider any other alternatives to foreclosure such as a loan modification.
Short Sale vs. Foreclosure
A short sale has several advantages over a foreclosure, but it has some disadvantages too. Here’s how it compares:
- Less Wait to Buy a New Home. If your house goes through foreclosure, you’ll have to wait five to seven years before a bank will give you a mortgage again. This waiting period may be reduced to three years if you can show the foreclosure was due to circumstances beyond your control. After a short sale, however, you could qualify for a home loan again in as little as two years.
- Control of the Sale. With a short sale, you control the process of selling your house. You can decide how much to ask for it, and you’ll know who the final buyer is. In a foreclosure, the bank simply seizes your home, and you have no way of knowing what will happen to it.
- Less Social Stigma. For many homeowners, a short sale is much less embarrassing than a foreclosure. To the neighbors, it looks just like any other home sale; only the bank knows that you’re getting less for the property than you owe.
- Continuing Payments. While you’re short-selling your house, you’re still on the hook to keep making mortgage payments until the sale is completed. If your house is in foreclosure, by contrast, you can stop making payments and continue to live in the house until the bank kicks you out.
- Same Effect on Credit Score. A short sale and a foreclosure both damage your credit rating by about the same amount. Either option can cause your credit score to drop by 105 to 160 points. Both of them leave a negative mark that will stick around on your credit report for up to seven years, but your score can start to recover after the first two years or so.
How to Do a Short Sale
To get approval for a short sale, contact your bank’s loss mitigation department, just as you would for a home loan modification. You’ll need to fill out an application and back it up with lots of documents showing all the details of your finances. The bank will use this information to figure out whether taking the short sale is really its only alternative to foreclosing.
Most banks also require you to have an offer from a buyer before they’ll accept a short sale. So you have to list the house at the lower price, get the offer, take it to the bank, then wait to hear whether the short sale has been approved before deciding whether to accept the offer. All this back and forth between the seller, the buyer, and the lender makes short sales a very complicated process that can take up to a full year.
It’s important to make sure that if the lender approves the sale, it also agrees not to sue you for the extra amount you still haven’t paid on the mortgage. Sometimes, the lender agrees to release its lien, or legal hold, on the property so you can sell it, but it doesn’t agree to accept the proceeds as full payment of your loan. Instead, it can seek a “deficiency judgment” against you to collect the extra money by such means as garnishing your wages.
In a few states – namely, Arizona, California, Nevada, and Oregon – deficiency judgments after a short sale are illegal. Unless you live in one of those four states, you must get a written agreement from your lender stating that they won’t seek one. Otherwise, you could sell your house for less than it’s worth and still be in the hole.
Deed in Lieu of Foreclosure
If everything else fails, there’s still one last thing you can do to avoid the long, painful process of foreclosure. It’s called a deed in lieu of foreclosure, and it’s a transaction in which you basically hand your home over to your mortgage lender. In exchange, the lender agrees to release you from your debt, even if it was more than what the home is now worth.
Deed in Lieu vs. Foreclosure
A deed in lieu is, in effect, still a foreclosure, but it’s a quicker and easier one. As soon as you hand over your house, your debt is canceled immediately. You also avoid the very public embarrassment of going through foreclosure proceedings.
A deed in lieu will probably hurt your credit score just as much as a normal foreclosure. However, you won’t have to wait as long before being able to buy a house again. Choosing a deed in lieu could reduce the wait time from a minimum of five years to four – or even two, if you can show extenuating circumstances.
How to Get a Deed in Lieu of Foreclosure
The deed in lieu process starts with contacting your bank’s loss mitigation department. You’ll have to fill out the same kind of paperwork as you would for a loan modification or a short sale, showing that you’ve suffered a financial hardship and can no longer meet your payments.
Just like you, your bank most likely looks on a deed in lieu as a last resort. It’s less costly and time-consuming for it than a foreclosure, but it’s not as good as a refinance or even a short sale. Some banks will require you to try selling the property before they’ll accept a deed in lieu, and they’ll ask for paperwork to prove that you’ve put it on the market.
If your bank agrees to a deed in lieu, you’ll have to sign two documents. The first hands over your home to the lender, and the second, called an estoppel affidavit, explains whether the bank accepts the deed as full payment for your mortgage debt. In most cases, the bank will release you from your debt after a deed in lieu, but in rare cases, it might reserve the right to seek a deficiency judgment against you. To avoid this problem, make sure before you sign the paperwork that it specifically states your deed in lieu settles your debt.
What Doesn’t Work: Foreclosure Scams
You might wonder why this article hasn’t mentioned any of the “foreclosure help” services that advertise through local papers, fliers, and online ads. These services claim that, in exchange for a fee, they can save your home from foreclosure. They may offer to:
- Negotiate with your lender to refinance your loan
- Take over your loan so that you pay your mortgage to them, not to the bank
- Perform a forensic loan audit to see if your lender is breaking any laws
- Help you find aid programs for distressed homeowners
- Help you file for bankruptcy
Unfortunately, these so-called services are really financial scams that prey on vulnerable people who are desperate to save their homes. At best, they’ll just connect you with real programs, like HARP, that you could use for free. At worst, they’ll steal the mortgage payments that should be going to the bank, digging you even deeper into debt.
In general, you can safely assume any program that offers to help you avoid foreclosure for a fee – as opposed to real programs from the government, which are free – is a scam.
Sometimes, there’s no way to save your home from foreclosure or one of its alternatives like a short sale. The good news is that it’s possible to rebuild your credit afterward so you can someday own a home again. Focus on paying all your bills promptly and paying down any other debts you have, such as credit card balances. After about two years, you should see your credit score start to recover.
When you’re finally ready to buy a house again, learn from your mistake so you don’t end up with another mortgage you can’t afford. Before you bid on a house, do the math and make sure the monthly payment doesn’t eat up more than 28% of your income. The lower you can get the payment, the better your chances of being able to keep the house if you face another financial setback.
What advice would you give to someone facing the possibility of foreclosure?