Closing on a mortgage and getting the keys to your new house is an exciting time.
But while a home purchase can provide stability and an opportunity to build equity, the experience doesn’t always end well.
The reality is:
A home is only yours for as long as you can make the mortgage payment.
And if you don’t make the payment, the bank can foreclose and take everything you’ve worked hard for — your property, your equity, and your stability.
The good news:
Foreclosure is avoidable.
Here’s what you need to know about the foreclosure process, as well as options when you’re struggling to make your mortgage payment.
How Does a Foreclosure Work?
Some people assume that foreclosures only happen to irresponsible mortgage borrowers.
But the truth is:
It only takes on financial hardship to pull the rug from under your family.
Many people who’ve lived through a foreclosure had every intention of fulfilling their financial obligation to the bank.
But life happens.
And at some point after closing on the property, they experienced a change in circumstance that made it impossible to make their home loan payment.
This can include a job loss, an injury, a divorce, or an illness.
Even if they had money set aside for a rainy day, it only takes a few months to drain a savings account. And once the savings is gone, default is inevitable.
When foreclosure becomes a possibility
It’s important to note that your mortgage lender won’t foreclose after your first missed payment.
If you can’t pay by your due date but eventually make the payment, you might only get hit with a late fee.
If your mortgage payment arrives more than 30 days past the due date, your mortgage company may report the late payment to the credit bureaus.
This can damage your credit score.
But if you make every mortgage payment thereafter, you don’t have to worry about a foreclosure.
As a side note, if you speak with your lender and provide an explanation for a late payment, the bank might not report a 30-day late payment to the bureaus, as a courtesy.
There’s no guarantee, but it’s worth a shot to protect your credit score.
But what if your financial hardship is more serious and months go by without making a payment?
In such a scenario, your mortgage lender will typically begin the foreclosure process after about three to six months. Understand, however, it might take up to 9 or 12 months to complete a foreclosure.
You can continue to live in the home during this process, but you will be required to vacate the home as soon as there’s a new buyer for the property.
Notice of default
Typically, your lender will issue a Notice of Default after about 90 days. This starts the pre-foreclosure stage.
During this stage, your lender gives you time to catch up delinquent mortgage payments.
So if you’re three month’s behind on your mortgage, you will need to give the bank three month’s worth of payments to stop the pre-foreclosure.
The length of the pre-foreclosure period varies by bank. It can lasts anywhere from 3 to 10 months.
Notice of sale
If you can’t make back payments, the next step is a Notice of Sale.
This is when your bank states its intentions to sell your home at auction, usually within 21 days.
Keep in mind:
At any time, you can catch up your mortgage payments and reinstate your mortgage, which stops the sale.
In many cases, you can reinstate your mortgage up until five days before an auction.
The public auction is the final stage of the foreclosure process.
This is when your mortgage lender sells your property to the highest bidder.
Once the property is sold, you must vacate within three days.
Options If You Struggle to Make Your Mortgage Payment
If you’re struggling to make your mortgage payment, there are a number of ways to deal with a delinquency that doesn’t involve a foreclosure proceeding.
Ideally, you’ll want to avoid foreclosure.
These proceedings can lower your credit score considerably, and a foreclosure remains on your credit report for up to seven years.
In all likelihood, your lender will reach out to you before starting the pre-foreclosure process.
It’s important that you answer the phone or respond to correspondences. Hiding from your bank will only make the situation worse, and you could miss out on provisions to save your home.
Some people ignore their lender’s letters and phone calls because they don’t want to hear a lecture. What they fail to realize is that multiple provisions can assist borrowers who struggle with payments. So in most cases, your lender will call to see how the bank can help you.
Depending on where you live, your lender can’t file a Notice of Default until 30 days “after” discussing payment problems with you.
Selling your home and moving before payment problems escalate is an option. However, it is much easier said than done.
It’s harder to sell when you’re upside down on your mortgage loan. In other words, you owe more than your property’s worth. Also, selling might not be an option because of too much competition in your local market.
Here are a few options when you encounter payment problems.
1. Short sale
This is when you sell your home for less than what you owe the bank. A short sale is an option if you’re upside down on your mortgage.
Your lender must approve of a short sale, which they’ll likely do if you’re struggling and behind on mortgage payments.
In the end:
It is better for the bank to get something for the property than nothing.
The pros of a short sale are that you’re able to move, and the process is less damaging to your credit score than a foreclosure.
The downside is that you have to wait 2 to 7 years after a short sale before you’re able to qualify for another mortgage.
2. Deed in lieu of foreclosure
With this arrangement, you’ll voluntarily turn over your property to the mortgage lender. You’re then released from the mortgage obligation and you don’t have to sell the property.
In most cases, your lender will be open to this arrangement because it’s cheaper and quicker than a traditional foreclosure.
This is an option when you know that you’re unable to come up with enough cash to save your home.
A deed in lieu of foreclosure will have a negative effect on your credit report. But the damage isn’t as severe as a foreclosure. You might be able to purchase another house in about two to four years.
3. Mortgage modification
A mortgage modification can also work if you’re struggling to make your mortgage payment, yet you don’t want to leave your home.
With a modification, the bank agrees to modify the terms of your original loan. This can include lowering your interest rate and your monthly payment to an affordable amount.
Typically, you would have to refinance in order to change the terms of a mortgage. A mortgage modification accomplishes this without a refinance.
This is an option when you don’t qualify for a traditional refinancing, maybe due to a damaged credit score.
Some lenders won’t offer a mortgage modification until after you’ve defaulted on your mortgage payment.
Plus, a mortgage modification can negatively effect your credit.
But on the upside, a cheaper mortgage payment can help you keep your home.
4. Forbearance or refinance
You might also be a candidate for a forbearance or refinance when struggling to make your mortgage payment. But only if you haven’t defaulted yet.
A forbearance allows you to temporarily stop making mortgage payments for a certain number of months. Your lender may approve this request if you’re experiencing a short-term hardship.
The pro is that this provision shouldn’t affect your credit score.
The con is that you’ll repay the missed payments over a fixed period to bring your home loan current. This amount is added to your regular mortgage payment, resulting in a temporary increase.
Refinancing is another option if you haven’t missed a payment yet. The benefit of refinancing is that it can help you get a lower mortgage rate and a lower monthly payment.
One disadvantage is that you must apply for a new mortgage loan and re-qualify. So your credit score and income must be sufficient. Refinancing is also expensive and you’re responsible for closing costs.
These costs can range between 2 percent and 5 percent of the mortgage balance.
Struggling to pay your mortgage can be a scary time, and you might fear the bank taking your home.
But although a foreclosure is a possibility in these situations, it isn’t the only outcome. Several provisions can save your home.
However, you must speak with your lender early. Together, you can come up with a game plan to protect your home and credit.