For homeowners paying off a mortgage, an unexpected job loss, illness or injury resulting in a significant reduction of monthly income can result in the possibility that the home may be lost. Falling behind on home payments can quickly lead to initiation of a foreclosure process. Depending on state law and the method used to secure purchase of the property, foreclosure may be judicial or non-judicial.
Judicial foreclosures require the loan servicer to file a lawsuit and seek court permission to foreclose. Non-judicial foreclosures require only that the loan servicer notify the owner in writing of payment delinquency and intent to foreclose and sell the home. Owners facing non-judicial foreclosure can involve the court which may result, at a minimum, in slowing down the process.
Foreclosure law varies by state, so one of the first steps homeowners should take is to become familiar with state law and consult an experienced real estate attorney. While laws differ, there are a number of procedural and substantive defenses that may be used in court to prevent or at least delay foreclosure.
Foreclosure Defenses
Never assume facts stated by the loan servicer are accurate. Be sure all loan payments have been property credited. If you have not missed all the payments indicated by the lender, advise the court and file proof of cancelled checks.
Note any excessive fees imposed by the loan servicer. Servicers sometimes overstate the amount required to reinstate the loan in good standing. Any information showing the loan servicer has made mistakes will encourage a court to be cautious before proceeding with foreclosure. In non-judicial foreclosures, failure of the homeowner to receive the initial letter advising the owner that he or she is in default will usually stop the process.
In addition to state law, federal laws must also be followed for foreclosures involving FHA, VA and USDA loans. These programs generally require loan servicers to actively work to prevent foreclosure by providing “loss mitigation” services intended to help homeowners lower mortgage payments and remain in their homes. Be sure procedures have been properly followed when these loan programs are involved.
Ensure there is a clear chain of title for any mortgage and promissory note. The bank which originally approved the loan may bundle it with others and sell the package to a different bank, investor or loan servicer. Only the entity currently holding the loan can foreclose. Although the chance of failing to have documentation may be small, if the servicer cannot provide the documents, it cannot sue, and the foreclosure action would need to start over.
A homeowner’s demonstration of a potentially legitimate foreclosure defense and the willingness to fight may delay or prevent losing the home. A loan servicer seeing this defense may be more likely to work out a loan modification after considering the time and effort which would be required to pursue foreclosure in court.
Other Positive Steps
In addition to employing specific legal defenses to a foreclosure action, there are a number of other actions homeowners can and should take which may delay or prevent loss of the home. If you fall behind in payments, contact your loan servicer before foreclosure action begins. A proactive approach might result in obtaining approval to pay less for a set period or extend the length of time needed to make-up delinquent payments.
Accept calls and review all mail from the loan servicer. Ignoring communication will not help. Being aware of all options, dates and requirements provided in these communications is a wiser choice so you remain fully informed and don’t lose out on possible action that could save your home. Acting early in the process when more options are available generally offers a better chance of success.
Take part in foreclosure mediation if available. Mediation involves the lender and homeowner working with a neutral mediator and attempting to work out a mutually agreeable solution to address past delinquency and future payments. Studies have shown that homeowners who get involved with mediation are more likely to prevent foreclosure.
Foreclosure Alternatives
Homeowners have a variety of alternatives that can be attempted to prevent loss of a home through foreclosure, or to minimize the financial impact of foreclosure on the owner’s credit rating if the house is lost.
Loan Modification
Convincing the loan servicer to change terms of the loan is the most common action used to prevent foreclosure. This can involve reducing the loan principal or interest rate, eliminating late fees for non-payment, providing a short period of time when payments will not be required and extending a period of time for repayment of past-due payments. Both the lender and homeowner may benefit from modification. The homeowner can stay in the home and the lender does not have to deal with the costly and time-consuming work to foreclose.
Short Sale
Homeowners who are behind in payments or own property that is worth less than what is owed on it might pursue a “short sale.” The transaction must be approved in advance by the mortgage holder. Once a short sale is conditionally approved, the buyer negotiates a sale price with the owner which must then be approved by the bank that will finance the purchase. Short sales can be time consuming but have potential benefits for all involved. The buyer generally gets a home for less than current market value. The seller avoids the significant credit score drop that results from foreclosure. The lender avoids the cost and effort of foreclosing, repossessing and selling the property.
Deed in Lieu
When the homeowner finds it is inevitable that the home will be lost, a last resort may be to negotiate with the lender to surrender the deed to the property in exchange for ending foreclosure proceedings. This requires both sides to agree to the exchange. The owner can often negotiate the date on which he will vacate the home and may even reach agreement to temporarily lease the home for a short period of time. The buyer is relieved of paying the balance on the loan, minimizes damage to a credit score and avoids any public spectacle of being evicted.
Bankruptcy
Filing for bankruptcy, while not necessarily a better alternative from a financial perspective, can be a useful strategic tactic. All foreclosure actions must immediately cease upon filing of a bankruptcy petition so, at the very least, homeowners can buy a little time to work on a solution. Filing for bankruptcy can also force the lender to prove it possesses properly perfected documentation supporting foreclosure.
Lenders typically object to homes being included in a bankruptcy filing, and eventually the foreclosure proceeding may recommence. However, bankruptcy can allow a homeowner to eliminate or reduce other debt so that more of the resulting available income can be put toward mortgage payments. Eliminating non-mortgage debt increases the chances of obtaining a loan modification thus preventing loss of the home.
Consultation with an experienced real estate lawyer should be a priority once foreclosure looks like a possibility. Facing loss of the family home is stressful, but taking a pro-active approach can delay foreclosure action allowing you to consider options, save cash for an eventual move and, in some cases, prevent loss of the home.