Nov. 8, 2023
Can you prevent foreclosure without filing bankruptcy?
Are you struggling to pay your bills? Have you asked yourself, can I prevent foreclosure without filing bankruptcy? The short answer is maybe. Mortgage lenders work on a timeline, especially with regards to foreclosure proceedings. If you are just beginning to struggle to pay your mortgage, it is best to start looking at your options. The first thing I would like to express is be proactive. Do not wait until you get the notice of the foreclosure sale to start trying to prevent the sale. If you wait too long to make decisions, to make calls, to ask for help, you can run out of time and fail to stop the foreclosure sale. If you do not want to read this post and wish to speak with someone, our team can offer a confidential, free consultation. Our team genuinely wants to help inform property owner of their options. If you do not already have a relationship with one of our team members, please feel free to give me a call- my name is Alicia DiGrazia and have spent approximalty half of my career working with distressed properties.
This post is not to be construed as legal advice. This is meant to remind you that you do have options. If you are possibly facing foreclosure action for past-due mortgage payments or if you are current on your mortgage payments, but are struggling to make ends meet and feel like you might fall behind soon, give us a call.
Foreclosure? What is it?
Let's start at the beginning. What is a foreclosure? When a homeowner begins missing payments on their mortgage the mortgage lender (or lienholder) can begin the process to take the home back. Then, the bank sells the house to recover the loan balance, sometimes more if there is additional equity in the home. That's the simplified version of a foreclosure. This process takes time. If you are proactive, you have a better chance of working out of a solution with the mortgage lender or selling the house while the market is still fairly good.
How Long is the foreclosure process?
The basic foreclosure process in California is: After 120 days of miss mortgage payments. The bank can file a notice of default (NOD), also called the first notice of foreclosure. This foreclosure notice is recorded and a copy is mailed to the homeowner. By this point, the mortgage lender has already sent multiple notices letting you know the payments are late and they are going to start the foreclosure process if you don't bring the loan current by a certain date. Once this notice of default (NOD) is filed, the homeowner has 90 days to bring the mortgage current before the bank has the right to file a notice of sale (NOT which stands for notice of trustee's sale), also called the second notice of foreclosure. This document is also recorded and mailed to the homeowner. The homeowner has 30 days to bring the payments current before the bank can send the property to trustees sale. When the trustees sale (also known as foreclosure sale) takes place. The bank sells the property to the highest bidder "at the courthouse steps". Following COVID many counties not offer remote bidding. If the home is not sold at the trustee's sale, it becomes Real Estate Owned by the bank, also known as REO. Once the property becomes an REO, the investor (sometimes the mortgage lender is not the investor on the loan) begins the eviction process if the property happens to be occupied. If the property is vacant, they begin preparing the property for sale.
The mortgage lender is required to reach out to the homeowner and provide options and phone numbers for homeowners to call to workout a solution before they start the foreclosure process. The bank and loan servicer does not want to take your home. They want you to resume your normal monthly mortgage payments and prefer you pay the late payments or workout a repayment plan for the missed payments.
Done reading already? Overwhelmed?
I get it, you have a lot on your mind at the moment, this is stressful. This post is localized to California, however some of the information is likely to apply wherever you are reading this post. If you have looked at our website, you can see that we are a real estate company located in Paso Robles, California. I want to take a moment and say that we can offer a free consultation if you are stressed and wish to speak with someone who can and will to discuss options with you. If you are located in California, and you do not already have a relationship with one of our team members; please feel free to give me a call- My name is Alicia DiGrazia and have is spent nearly half of my career working with distressed properties. If you have a relationship with one of our team members, please give them a call.
What are your options to prevent foreclosure?
If you reach out to your mortgage lender and/or our team early enough in the process, chances are, that you will be able to find a solution to allow you to stay in the home. These options do not come without consequences and you should obtain legal advice from a qualified real estate attorney before making any final decisions. Knowing your options will allow you to make the best decisions for your family and financial situation. It is common for those who are struggling to pay their mortgage, to also be struggling with credit card debt, medical debt, auto loans, and/or debt collectors. You likely just desire to make all of the phone calls stop.
There are a few options the mortgage lender can offer, they are listed below and I will break them down a little more in later sections. The first decision is to decide if you want to stay in your home or move.
Options to stay in the house~
4- Repayment Plan
5- Payment Deferral
6- Loan Modification
Options to leave the house~
2- Short sale
Options to stay in your home
Refinance your mortgage
If you are current on your mortgage payments and have enough equity, you can refinance your home. This was a great option for 2019-2022, however interest rates have started to increase significantly in late 2022, and further increased in 2023. Be really careful of the loan programs out there, that offer low teaser rates. The last thing you want is to refinance today and get hit with a higher payment in a year or two down the road and find yourself back in the same problematic situation.
Forbearance is a temporary postponement or reduction of loan payments. This is a short-term option and is not automatic, the lender has to agree to this option. Don't just stop making your payments, or you could trigger the foreclosure process. You must reach out to your mortgage lender and be able to provide proof of your financial hardship. If forbearance is approved you must comply with all of your mortgage lenders forbearance requirements, or risk triggering the foreclosure process. There is a chance, if approved, your mortgage payments could increase, (often temporarily), after the forbearance period ends. This is often combined with a reinstatement or a repayment plan to pay off the missed or reduced mortgage payments (when your financial situation stabilizes).
Reinstatement is the simplest resolution considering it entails paying off the delinquent amount and resume regular loan payments. This only makes sense if you are able to make a lump sum payment by a specified date.
Repayment plans typically set up a schedule to repay the missed payments and bring the loan current over a 6 to 12 month period. This often adds a portion of the overdue amount to each monthly payment. This is a good option if you have recovered from your hardship and are able to afford the monthly payment and a little more to cover past-due amount.
Payment Deferral allows you to defer up to two months of missed payments to the end of you mortgage term without accruing any additional interest or late fees. Ask your mortgage lender if they offer payment deferral. If you have overcome your hardship, but you are unable to afford the reinstatement or repayment plan options the payment deferral maybe be a good option for you. This will allow you to resume your pre-hardship monthly mortgage payment.
A loan modification is a change made to the terms of an existing loan by the lender. This may involve a reduction in the interest rate, adjust the repayment plan (likely extend the length of the repayment), offer a different type of loan or a combination of the options. Be prepared to submit tax returns, income documentation and letters regarding your hardship. Loan modifications often take time, so do not wait until the notice of default is filed to reach out for help. Loan modification, if approved, is often a long term option for borrowers experiencing financial hardship or loss of income. Applying for the loan modification does not mean the foreclosure process has stopped. In move cases it has not. During the last recession I met many homeowners who were waiting for a response to their loan modification and lost their homes.
Sometimes, bankruptcy is the best option. If you have quite a bit of credit card debt (also known as unsecured debt) and medical bills in addition to your mortgage debt, bankruptcy might be a good option. Although humbling, bankruptcy can, in some cases, stall or stop a foreclosure and offer you a clean slate, financially speaking. Obtain legal advice from a qualified bankruptcy lawyer in your state if you believe this could be a good option for your situation. There are multiple options and you will want to work with a qualified bankruptcy attorney to select the type of bankruptcy that is best for your situation. The bankruptcy process includes a bankruptcy filing and going to bankruptcy court and does take some time. Again, often you can use bankruptcy stop foreclosure, and give you time to workout a plan. Using an experienced bankruptcy attorney could prove to be your best friend through the bankruptcy process.
The purpose of this post is to remind you that you do have options. If you are possibly facing foreclosure action due to past-due mortgage payments or if you are current on your mortgage payments, but are struggling to make ends meet. And feel like you might fall behind soon. Feel free to give us a call. We are not a tax attorney or financial advisors, nothing in this post should be construed as legal advice. But we are knowledgeable, trustworthy and keep your situation in the strictest confidentiality.
Option to leave your home
Selling your home
Selling your home and paying off the debts is always an option and sometimes one of the best ways to offer debt relief and improve your financial situation. Many homeowners have equity and can pay off the mortgage lender (or lenders) and often pay off medical debt, credit card debt, auto loans and other outstanding debts, depending on how much equity is in the home. There is an inventory shortage in many markets, especially here in San Luis Obispo County California. Although many homes are not selling within the first week, if priced correctly, they are selling within the first 30 days of hitting the market. Some escrow companies will allow you to submit credit cards (statements) and auto loans and medical bills to be paid off when the house closes to help reduce your debt with the equity in your house if there is enough money. Ask your escrow officer if they offer this service. Often this is the fastest and simplest solution to obtaining long term and much-needed relief to financial challenges.
In this situations where you do not have enough equity in your home to pay off the mortgage lender, (or mortgage lenders) you will need to do a Short Sale. This means selling the house for less than what is owed on it. The bank will require you to submit financial documents and a letter of hardship. Short Sales have to be approved by the bank and the foreclosure process will not stop while waiting for short sale approval. Again, do not wait until the last minute to choose this option, short sales take time. Often a mortgage lender has a short sale packet on their website that you can download. This enables you and your realtor to fill out and submit the required documentation to the lender before putting your home on the market. Often a mortgage lender offers pre-approved short sales which enable you to go through the short sale process before putting the house on the market. If your mortgage lender does offer pre-approved short sales, go through the process. Pre-approved short sales bring the home onto the market at a price already approved by the mortgage lender and it expedites the entire process. This is the second best solution to obtaining long term and much-needed relief to financial struggles. Although it often does not include other debt, you can create a plan of attack to pay off any outstanding debt you may have. Check out this blog post here for some simple solutions.
Deed-in-lieu of Foreclosure
Another option is a Deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure sale means you sign the title of the house over to the bank and you move out. There is still damage to your credit but it is not as bad as if you were to let the home go through the foreclosure process. You will have to move out of the house but you may be able to negotiate the timing of the move.
Loan Assumption. An assumption is where someone else takes over your mortgage debt. This has to be approved by the mortgage lender and they will need to approve the a new qualified buyer to assume your mortgage debt. Again, do not wait until the last minute to choose this option, assumptions can take time.
If you have to sell your home (or are thinking about selling your home) you will need to be proactive at looking for a place to go. Unfortunately, rents are high in many areas and there are few rentals available. Also, if your credit has already been significantly damaged it could be hard to find a place to rent because most landlords do check a prospective renter's credit score. If you have a compelling situation, you may be able to submit a letter with your rental application. In this letter tell the landlord your situation as well as the process you plan to use to remedy the situation. There are many people out there who are open to helping someone if given a supportable reason.
The Good News
This struggle is just a short, often emotional, time in your life. Once it is over, you can move on with your life with some much-needed relief and begin the healing process. Both emotionally and financially. If you were proactive than the financial healing will likely be relatively quick. If you could not avoid filing bankruptcy, these stay on your credit report for 5-10 years. If you could not avoid foreclosure, these stay on your record for around 7 years. While financially healing, start healthy financial habits like creating a monthly budget and start building your savings accounts. Check out these posts on another blog - Simple method to pay repair credit and pay down debt and simple ways to build your savings.