No one wants to be forced into foreclosure after finding a suitable home, but sometimes it’s the best option when times get especially tough. However, there are a number of ways homeowners can prevent foreclosure or at least manage the process more smoothly. Below are answers to the most frequently asked questions regarding the prevention and management of a foreclosure.
Will the bank negotiate with me to lower my interest rate and payment and prevent foreclosure?
Some lenders are more willing to adjust your mortgage than others, so you should always call your bank’s loan mitigation department to try. Typical solutions banks will put forward include accepting partial payments for a set period of time, accepting late payments or simply modifying the terms of your loan.
The federal government has also set up programs to help homeowners prevent foreclosure, such as FHASecure, Hope for Homeowners and the Homeowner Affordability and Stability Plan. The Homeowner Affordiability and Stability Plan is the latest program offered by the federal government and allows you to: (1) Modify your mortgage: people about to default should consider this option first, as it tries to reduce the size of the payments (by up to 31%) by reducing the interest rate on the mortgage for a set period of time (typically 5 years). To qualify, the unpaid principal of your mortgage must be less than $729,750. (2) Refinance your mortgage: people who are in trouble because their house has lost a significant amount of equity in the last few years (even those who are “underwater”) should consider this option. Note, however, that you cannot be underwater by more than 5 percent. Typically you need considerable equity to qualify for a refinance loan, but under this program owners may need little or no equity at all. To qualify, your loan must be owned by Freddie Mac or Fannie Mae, your mortgage must be less than $417,000 (unless you live in certain high priced areas such as New York, but if such is the case, you should consider modification over refinance) and you cannot be more than 30 days late on your monthly payments for the prior year.
Can I just sell my house for less than what I owe on it?
Selling your house for less than you owe is referred to as a “short sale”, and in many states, you must get the permission of your lender before you do this. If you don’t, the lender may sue you after the sale for the difference. If you live in a state that does allow this, then you can sell your house for less than the mortgage amount and the lender can’t do anything about it. Finally, short sales typically aren’t possible if you have more than one mortgage, unless the same lender owns the additional mortgages.
Can I file for bankruptcy to prevent foreclosure?
Usually Yes, you can. But not always. Sometimes, bankruptcy cannot prevent foreclosure, but it can certainly delay it. You really need to speak with a bankruptcy lawyer to know if it will work in your specific circumstances. Once you file, the court can enter a “stay” which would cease all collection actions, sales and foreclosures. The lender must then file for a motion to “lift the stay” and proceed with the foreclosure. This may be an attractive option if it also makes sense for other reasons since you can essentially live in your home for free for awhile and use the money you saved to secure a new place to live or help with your outstanding mortgage payments.
What will happen to my tenants if my property is foreclosed on?
Leases are generally wiped out upon foreclosure, unless the lease preceded the mortgage (which is rare). That does not mean, however, that your tenants will just up and leave immediately. You must give them proper notice of eviction (up to 90 days in some places), and there are a variety of other potential laws that may prevent your tenants from being evicted (such as Section 8 housing laws).
Can I give my lender the deed to my house instead of foreclosing?
Sometimes you can, but in most states the lender can still sue you for the difference between what it sells the house for versus what you owe. Thus, this is not an attractive option unless you can get your lender to agree, in writing, to not sue you for the difference. Similar to short sales, this option typically isn’t available if there is more than one mortgage on the property unless the additional mortgages are held by the same lender.
Homeowners who are hoping to stop foreclosure often dread dealing with the facts that got them to this place to begin with. Dealing with those facts can be depressing. If they think back to when they first bought that home, losing the home was probably the furthest thing from their mind. Few homeowners actually plan to go into foreclosure. Apart from those who knowingly participate in mortgage fraud with the intention of never making a single payment, most homeowners face sudden extenuating circumstances that force them to stop making timely mortgage payments. Here are a few of those reasons:
• Job loss/unexpected unemployment
• Sudden illness or medical emergency
• Death in the family
• Divorce/loss of a second income
• Excessive debt obligations
• Job demotion or promotion denials
• Inability to pay an adjustable interest rate that increases
• Unexpected major home maintenance expense
• Balloon payments due
If you’ve fallen behind on your mortgage payments and find yourself facing imminent foreclosure, it could still be possible to save your home. And if saving your home is no longer an option, you might at least be able to delay the foreclosure process and gain more time to live in the property without making any payments. If your foreclosure sale is scheduled to take place in a matter of days, you can stop the foreclosure in its tracks by filing for bankruptcy. Upon your filing, something called an automatic stay goes into place. The stay immediately puts the foreclosure on hold during the bankruptcy process. The lender may try to get around the automatic stay by filing a motion to lift the stay and asking permission from the court to continue with the foreclosure proceeding. But even if the lender’s motion is granted, the foreclosure will still probably be delayed for at least one or two months, during which time you can continue trying to work out a foreclosure alternative. If you want to save your home, you might be able to do so by filing Chapter 13 bankruptcy. If you can’t make your mortgage payments and keeping your home isn’t an option, Chapter 7 bankruptcy might still be able to help you make the most of the foreclosure.
Chapter 13 Bankruptcy
If you’re facing foreclosure, a Chapter 13 bankruptcy allows you to make up the mortgage arrears through your plan (something you can’t do in a Chapter 7 bankruptcy). Chapter 13 can also potentially help you save your home because it will reduce the amount of debt you will have to repay, thus freeing up your money to put toward paying your mortgage. With a Chapter 13 bankruptcy, you’ll be required to propose a repayment plan. If the court approves your plan, and you’re able to stick to the plan for the required three to five years, then your remaining unsecured debt will be discharged and you’ll be able to retain your home.
Chapter 7 Bankruptcy
If you’re in arrears and facing foreclosure, Chapter 7 bankruptcy doesn’t provide a way for you to catch up. So, unless you can negotiate something with your lender independently from the bankruptcy, you’ll most likely lose your home. But filing for Chapter 7 bankruptcy can still provide benefits. Perhaps the biggest benefit is the delay in foreclosure proceedings. A delay will allow you more time in your home and give you the opportunity to save money (because you won’t be making any mortgage payments during the delay) and to try to work out a foreclosure alternative with your lender. Chapter 7 bankruptcy will also eliminate your personal liability for your mortgage debt; you’ll probably still lose your home, but you won’t be liable for any deficiency remaining after the foreclosure.
Risks of Filing Bankruptcy
Filing for bankruptcy is a serious step and should be carefully considered. Most significantly, a bankruptcy filing can result in the loss of other valuable property and will damage your credit score. Keep in mind, though, that foreclosure will also damage your credit score, and the benefits of filing bankruptcy (the discharge of your mortgage and unsecured debts) might outweigh any hit you might experience to your credit.
Sue Your Lender
If you’re facing a judicial foreclosure, by the time of your scheduled foreclosure sale, you technically already had your chance to fight the foreclosure in court. But if you’re facing a non-judicial foreclosure (a foreclosure that doesn’t go through the court), then you might be able to slow or stop your foreclosure at the last minute by filing a lawsuit. But you can’t stop the process just because you want more time to live in the home. You must have some legal reason or valid defense that’s based in good faith for fighting the foreclosure. To succeed in your suit against your lender, you’ll need to prove to the satisfaction of the court that the foreclosure should not take place because, for example, the party foreclosing is not the party that owns the mortgage note, the lender (or servicer) didn’t take all of the legally required steps in the foreclosure process, or the lender (or servicer) made some other serious error. The downside to suing your lender is that a lawsuit can be very costly. If a court doesn’t believe your allegations against the lender, your lawsuit will serve only to delay rather than prevent your foreclosure. But even a delay to your foreclosure might be enough of an incentive for your lender to reach a settlement with you.
Apply for Loss Mitigation
While you can’t wait until the last minute before a foreclosure sale for this option to help, you might be about to stop or delay a foreclosure by applying for loss mitigation (an alternative to foreclosure). Under federal law, if you send the servicer (the company that handles the loan account on behalf of the lender) a complete loss mitigation application more than 37 days before a foreclosure sale, the servicer can’t ask a court for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until:
• it tells you that you don’t qualify for a loss mitigation option (and your appeal, if you get the right to appeal, has been exhausted
• you turn down all loss mitigation offers, or
• you don’t stick to the loss mitigation agreement, like if you fail to make payments on a trial modification.
In most instances, the servicer has to make a decision your application within 30 days and can proceed with the foreclosure after any of the three above conditions is satisfied. Also, the servicer doesn’t have to review multiple loss mitigation applications from you. But if you get current on the loan after submitting an application, and you later submit another application, the servicer has to review it. A few states also have laws that prevent a foreclosure from going ahead if the borrower submits a loss mitigation application, some of which are more generous than federal law. If you’re facing foreclosure, you might be able to stop the process by filing for bankruptcy, applying for a loan modification, or filing a lawsuit.
If a foreclosure sale is scheduled to occur in the next day or so, the best way to stop the sale immediately is by filing for bankruptcy. The automatic stay will stop the foreclosure in its tracks. Once you file for bankruptcy, something called an “automatic stay” immediately goes into effect. The stay functions as an injunction prohibiting the bank from foreclosing on your home or otherwise trying to collect its debt. So, any foreclosure activity must be halted. The bank may file a motion for relief from the stay. The bank will probably attempt to have the stay lifted by filing a motion seeking permission from the court to continue with the foreclosure. Even if the bankruptcy court grants this motion and allows the foreclosure to proceed, the foreclosure will be delayed at least a month or two. This should provide you with time to explore alternatives to foreclosure with your bank.
Chapter 13 Bankruptcy vs. Chapter 7 Bankruptcy
If you want to keep your home, a Chapter 13 bankruptcy might help you accomplish this goal. But if you’re simply trying to buy some time by stalling the foreclosure, a Chapter 7 bankruptcy might be right for you.
Benefits of a Chapter 13 bankruptcy
A Chapter 13 bankruptcy can help you keep your home by restructuring your debts. You will repay debts some in part and some in full over a period of three to five years as part of a repayment plan. You might be able to avoid foreclosure and remain in your home with this type of bankruptcy because you can repay any delinquent mortgage payments through the plan. Also, you will likely pay a fraction (or sometimes, none) of your unsecured debts during the plan period and possibly eliminate certain other debts like underwater second and third mortgages because they’re considered unsecured loans entirely when you complete your plan, freeing up money for your first mortgage. Even if you can’t complete the plan, filing for Chapter 13 bankruptcy will give you at least several months before a foreclosure can be completed.
Benefits of a Chapter 7 bankruptcy
If you’re already in foreclosure, filing Chapter 7 bankruptcy isn’t usually a good way to save your home unless you can get a loan modification. But it will delay the foreclosure proceedings and provide you with time to live in the home without making payments. You can put this money towards saving up for a rental. You can also use this time to try to work with the bank to come up with a way to avoid foreclosure. And, even if you still go through a foreclosure, a Chapter 7 bankruptcy can eliminate your personal liability for the mortgage debt, which means you won’t be liable for any deficiency remaining after the foreclosure. Also, if you already filed for bankruptcy within the past year, the stay could be limited to 30 days or eliminated altogether. If your bank is using a non-judicial process to foreclose where the foreclosure is completed outside of the court system then you might be able to delay or stop the foreclosure by filing a lawsuit against the bank to challenge the foreclosure. This tactic normally won’t work if the foreclosure is judicial because by the time of a foreclosure sale, you’ve already had your opportunity to be heard in court. To prevail, you’ll need to prove to the satisfaction of the court that the foreclosure should not take place because, for example, the foreclosing bank:
• can’t prove it owns the promissory note
• didn’t act in compliance with state mediation requirements
• violated a state law, like a Homeowner-Bill-of-Rights law
• didn’t follow all of the required steps in the foreclosure process (as determined by state law), or
• made some other grievous error.
The downside to suing your bank is that if you’re unable to prove your case, you’ll only delay the foreclosure process, perhaps briefly. Lawsuits can be expensive and, if you have no reasonable basis for your claims, you could get stuck paying the bank’s court costs and attorneys’ fees.
Apply for a Loan Modification
While you can’t wait until the last minute with this option, you might be able delay a foreclosure by applying for a loan modification, or another foreclosure avoidance option, because the bank could be restricted from dual tracking. Dual tracking is when the bank proceeds with the foreclosure while a loss mitigation application is pending.
Ultimately, if your modification application is approved, the foreclosure will be permanently stopped so long as you keep up with the modified payments.
Federal Rules Restrict Dual Tracking
Under federal law, if a complete loss mitigation application is received more than 37 days before a foreclosure sale, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until:
• the servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted)
• the borrower rejects all loss mitigation offers, or
• the borrower fails to comply with the terms of a loss mitigation option such as a trial modification.
Be aware that the servicer generally doesn’t have to review more than one loss mitigation application from you. But if you bring the loan current after submitting an application, the servicer must consider it. If you’re facing an imminent foreclosure sale and considering any of the options discussed, it is strongly recommended that you consult with a local foreclosure attorney or bankruptcy attorney immediately.
Foreclosure Lawyer Free Consultation
If you are in the foreclosure or pre-foreclosure process, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506