Foreclosure can be a devastating event for homeowners, who may not only lose their home but also see their credit score drop, find it hard to get loans in the future, pay higher interest rates on their credit, and so on. Fortunately, there are numerous state and federal legal safeguards in place to assist homeowners in avoiding foreclosure or, if it cannot be avoided, at least mitigate the losses and other negative consequences.
When a homeowner falls behind on a loan for a certain number of payments, their bank's loan servicer will send them a notice with a deadline to cure their default or face foreclosure. The cure period will vary by state and federal law.
If the loan is not cured within that period, the lender will initiate foreclosure proceedings. In judicial foreclosure states these are conducted within the court system, and in nonjudicial foreclosure states they are conducted through an independent party called a trustee.
If the loan is not reinstated or other loss mitigation options are not utilized, the lender will be allowed to proceed with the foreclosure in which case the property will be sold to the highest bidder at a public auction. After the property is sold, the homeowner will be given a certain period within which to vacate the premises or face eviction.
Loss mitigation refers to the mechanisms by which loan servicers and borrowers collaborate to avoid foreclosure. It should be noted that federal "dual tracking" requirements mandate servicers to provide homeowners with fair and efficient processes for applying for loss mitigation alternatives and evaluating their suitability for such options. They also prevent servicers from proceeding with foreclosure proceedings until they provide homeowners with written evaluations explaining why they did not qualify for loss mitigation.
Loss mitigation options include:
Keep in mind that not everyone can always choose from these possibilities. For instance, homeowners who are temporarily unable to make their payments owing to unforeseen circumstances like job loss, injuries, or illness may be entitled to special forbearance options. Lenders were required to provide special forbearance and payment deferral options to large segments of the population during the 2008 subprime mortgage crisis and COVID-19.
A deed in lieu of foreclosure is a transaction in which the homeowner voluntarily surrenders title to their home in exchange for the cancellation of their debt. Depending on the circumstances and the state, the lender may be required to accept a deed in lieu, and, where the lender is not so required, they may agree to it anyway because it is cheaper and quicker for them than a full foreclosure proceeding. A short sale is similar except that the borrower sells the home to a third party and then uses the proceeds to pay the lender.
These are also loss mitigation options to be explored with your servicer, and while you will not be able to keep your home with either of these options, by technically avoiding foreclosure you can minimize your costs and legal fees and usually avoid a deficiency judgment (which would require that you pay back additional amounts still owed on the loan in case the property was sold for less than the balance of your debt).
The right of payoff allows a borrower to avoid foreclosure by paying off the entire loan at once. Most of the time, this option will be used when the borrower has found a better deal on a new loan from a different lender. The right to redemption is similar, except that it extends even further for a period after the home has been sold at foreclosure.
While Chapter 7 bankruptcy (also referred to as a “liquidation” bankruptcy) allows one to discharge most of their unsecured debt, it does not discharge a mortgage debt secured by the property, and therefore is not much use in avoiding foreclosure. However, if you meet the eligibility criteria for a Chapter 13 bankruptcy (also referred to as a “reorganization” bankruptcy), the court may approve a plan that would allow you to pay back your missed mortgage payments over a three- to five-year period.
As you can see, there are a variety of state and federal regulations that have the potential to apply to the specific circumstances of each individual. It is of the utmost importance to have access to competent and experienced counsel who can guide you through the process of determining which solutions are most suitable for you and your situation.