Facing foreclosure is scary: it means eviction, losing your house, damage to your credit, and consequent trouble with job applications, loan applications, and even renting options.
A lot of homeowners feel overwhelmed when they accrue missed payments and receive Notice of Default. They often do nothing, hoping it’ll go away: but foreclosure never goes away, unless you’re willing to do something about it. Do not give up hope yet: here are some last minute ways to stop foreclosure.
How to Stop the Foreclosure Process at the Last Minute
There are a few options to avoid foreclosure when there is very little time left, even if an auction date has already been scheduled. Here are 5 ways to stop foreclosure:
1. Sell Your House Fast
One of the best ways to stop foreclosure immediately is to sell your house fast. I know, I am sorry: it’s probably not what you wanted to hear, but it negates all the consequences of foreclosure, and you could walk away without outstanding debts. Let’s talk about it.
If you’re facing foreclosure, all your lender wants is their money back. A traditional sale takes on average 3 to 6 months. Even if you got an offer the next day after listing, it could still take up to 45 days to close, which in many cases is too much time and with no guarantee that it will be finalized.
Your best option is to sell your house for cash. The main benefit of a cash sale is that cash buyers can prove to the lender the existence of available funds. In some states, this puts an automatic stop to foreclosure, while in others it is a simple matter of negotiating and signing some papers to make the intent legal.
What if you owe more than the house is worth?
If your home loan is higher than the house’s market value, then you have an underwater mortgage, also known as an upside-down mortgage. This scenario often occurs when:
- It’s a Buyer’s Market and house prices decrease, also reducing your equity
- You missed payments and your accumulated interest increases how much you owe to the lender
- Your property has suffered damage or needs extensive repairs, dropping its appraisal value compared to how much your loan is worth
When this happens, you may need to do a short sale to a cash buyer who does not need mortgage financing.
What is a Short Sale?
A short sale is when you sell the property for less than the remaining balance of the loan, plus additional fees incurred from late payments and foreclosure proceedings. Short sales require approval from the lender, because they have to agree to take less money.
Short sales are fairly simple when you already have a buyer to present to the lender. Lenders are more willing to approve cash buyers because they can prove they have immediate funds available.
Once the lender approves the cash offer, you’ll close, give proceeds to the lender, and hand over the keys to the buyer. Any money left over, you can pocket for yourself.
How to Find a Cash Buyer
A cash buyer is usually a real estate investor or iBuyer.
For example, Zillow Offers was an iBuyer. The catch, however, with iBuyers is that they typically charge a service fee and only buy properties that need some cosmetic improvements. They often stay away from situations that require too much effort on their part, like negotiating with a lender.
Now, there are many real estate investors, good and bad. You can do a quick search and find hundreds looking for houses in your area. But how do you know which ones are good and which ones will try to scam you?
SolidOffers can put you in touch with reputable real estate investors in your local market. We verify all investors who sign up to be a part of our program, and continuously evaluate them based on the feedback and experience of homeowners such as yourself.
We are not iBuyers, so you don’t have to worry about hidden fees; there will be none for our services. The investors who are accepted into our program subscribe for a membership and commit to remain up to standards, and those who excel are considered premium investors.
Our investors will purchase a house in any condition “as-is,” and many are local and well familiarized with local and state laws and have their own attorneys, removing the burden from you. All you have to do to get started is request a non-obligation offer for your house in foreclosure.
2. File for Bankruptcy
If a foreclosure sale is scheduled, filing for bankruptcy will put an immediate stop to it, or rather, it’ll delay it, giving you more time.
What happens when you file?
The bankruptcy process depends on the type you file – Chapter 7 or Chapter 13. We’ll talk more on those in a minute, but a couple things happen when you file for bankruptcy.
First, an “automatic stay” goes into effect. An automatic stay is an injunction that stops foreclosure proceedings and prohibits creditors from taking collective efforts against you. Typically, the stay lasts until your case is closed, but there are exceptions – reasons the stay can be lifted, based on your situation.
Second, you’re given a case number, and your case is assigned to a bankruptcy trustee. The trustee will gather and verify important information and meet with your creditors.
What happens next depends on what you want to do: do you want to keep your house, or are you willing to sell it to pay back what you owe?
Chapter 7 Bankruptcy
Chapter 7 is often called liquidation bankruptcy because you sell your assets to satisfy a portion (if not all) of what you owe. Some assets, like your retirement account, house, and car, are exempt from liquidation. You’ll have to discuss with a bankruptcy attorney what is and is not exempt.
Chapter 7 is your best option if you want to buy yourself time to make arrangements with the lender. Arrangements can be a loan modification or a short sale of the property. Whatever you decide, you’ll be given 3 to 4 months to live in the house without making payments. When your time is up, if you’ve done nothing to alter your state of affairs, the lender can foreclose on the property. Chapter 7 then eliminates your liability for the mortgage debt, so you’re not liable for any deficiency remaining after the foreclosure sale.
A word of advice: you do not want foreclosure AND bankruptcy in your credit report.
Those derogatory marks together will plunge your credit score and make it difficult for you to secure new lines of credit, apply for a loan, purchase a new house or explore renting options without increased interest and security deposits. A bad credit report even follows you into a job interview, as employers consider it a mark against your character. Bankruptcy and foreclosure stay on your credit report for 7 to 10 years.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is better known as reorganization bankruptcy. It does not require you to sell assets to satisfy your debts. Instead, the bankruptcy trustee assigned to your case organizes your debt into a structured repayment plan, so you can pay off creditors in 3 to 5 years.
After you pay the filing fee ($313) to the bankruptcy court and provide needed information, you’ll propose the repayment plan. A judge will determine if the plan is fair and meets requirements. You will make monthly payments, which the trustee will distribute to creditors. You’ll still make mortgage payments to the lender, but the repayment plan will make up delinquent payments.
Can a Bank Foreclosure during Bankruptcy?
Filing for bankruptcy will stop foreclosure immediately, BUT the lender can file for relief from the stay to continue foreclosure. To stop this from happing, you’ll want to explore alternatives with your lender and come to a new arrangement.
3. Seek a Loan Modification
A loan modification is just how it sounds: it is a change to the terms of your existing loan. The change can be reducing the interest rate, extending the time for repayment, a different loan type, or a combination of the three, resulting in a more affordable monthly payment.
In truth, it’s not a good idea to wait till the last minute to apply for a loan modification. Lenders are more likely to negotiate and approve when you contact them shortly after your first missed payment.
If you ignore the situation and their attempts to reach out, it is unlikely that they will approve it. Plus, not all lenders stop foreclosure while reviewing your request to modify the loan. It depends on where you are: some state laws prohibit dual tracking – that’s when a lender proceeds with foreclosure while at the same time a loss mitigation application is pending.
Federal law, on the other hand, prohibits dual tracking if the application was received 37 days before the foreclosure auction. It’s a tricky area, so the best thing you can do is put in your request sooner rather than later.
Most times, when it’s a good relationship, a lender agrees to a loan modification because it’ll be less costly than foreclosure. Loan modifications have their drawbacks, however, including:
- Paying a higher amount overall if the payment term extends;
- House is worth less than the new mortgage;
- Processing and legal fees, late fees and back taxes apply;
- Any portion of the loan that’s written off is taxable income; and
- Damage to your credit score if the lender reports the modification as a debt settlement.
4. Get a Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a last resort ditch effort to keep foreclosure out of your credit report, after you’ve exhausted all other options.
What is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a legal and binding contract in which you transfer the title of the property to the mortgage lender in exchange for mortgage relief. You give them the deed and the keys, and the house is no longer yours, it’s theirs.
Pros of a Deed in Lieu of Foreclosure
- Stop foreclosure process
- Spare your credit rating from mark of “foreclosure”
- Walk away from your mortgage scot-free
Cons of a Deed in Lieu of Foreclosure
- Still leaves a negative mark in your credit report
- Lender might report deficiency (after they sell the property) to credit bureaus
- Forgiven debt is taxable income
But wait: I thought a deed in lieu saves your credit? It can stop foreclosure from appearing in your record, but a deed in lieu is still itself a derogatory mark that’ll last 7 years and drop your score anywhere from 50 to 125 points, depending on what your score is when you sign the deed over.
Reasons a Lender Will Reject a Deed in Lieu
Lenders always assess the risks before shaking hands. They’ll appraise your property and the situation, and in the end might reject the deed in lieu for one or more reasons:
- They’ll make more money at a foreclosure auction
- Any subsequent liens filed against the property will become the lender’s responsibility
- The property is in bad condition and/or worth less than the mortgage balance
- It’s a bad market, and the house may sit, incurring carrying costs
5. File a Lawsuit
Filing a lawsuit only works with non judicial foreclosures. A non judicial foreclosure, not to sound obvious, is a foreclosure that does not go through the court system. A lender might also call it a Power of Sale, because of the ‘power of sale’ clause in the mortgage agreement. Without that clause, the lender has to take you to court to foreclose.
How Much Does It Cost?
Filing a lawsuit may be the best legal option you have to stop foreclosure and save your house; however, it does not come cheap. Also known as mortgage litigation, it incurs filing fees, and you’ll need representation in the court room. After sifting through foreclosure lawyers, hopefully you find one who can help prove your version of events.
You’re challenging the lender’s right to foreclose. You (with help from your foreclosure attorney) must demonstrate the lender made some error significant enough to stop foreclosure. Most cases, be warned, do not make it to trial, so have your ducks in a row.
SolidOffers Can Help You Stop Foreclosure
If the foreclosure process is already close to its end, selling your house is the quickest, easiest, and least impactful way to stop foreclosure.
We can put you in touch with trustworthy cash buyers in your local market who make fair cash offers on “as-is” properties, so you don’t even need to worry about repairs. Our friendly investors usually cover closing costs and additional fees, saving you money, and can close in as little as 7 days.
There is no fee for our services. We are happy to give you a free, no-hassle, no-obligation offer today: just click below to get started. We’ll also empower you with need-to-know foreclosure information and give you a free consultation on what’s right for your situation.
What has been stated in this article does not constitute legal advice. Real estate law differs between states, and we recommend you seek advice from a foreclosure attorney or bankruptcy attorney or another professional to help you determine your best ways to stop foreclosure at the last minute.