When a homeowner cannot make their monthly payment of the principal and/or interest on their mortgage, the lender can have the home “foreclosed” on as stipulated in the terms of the mortgage contract. This means the lender can take ownership of the property, have the current homeowner evicted, and resell the property.
What Happens When a Mortgage Payment is Missed?
If you miss a mortgage payment, your lender has the legal right to protect their investment in your loan by repossessing the home and legally forcing you to leave the home. If the lender resells the home for less than what you owe or the property value has decreased below what you still owe on the home, the lender can pursue a Deficiency Judgement to regain some of what they lost from you. Both a judgment and a foreclosure can severely negatively impact your credit score and ability to purchase another home. Avoiding foreclosure is the best way to avoid negative effects on your credit history.
How Can a Foreclosure be Avoided?
If you are struggling to make your payments or know that you will struggle to make your next payment (e.g. due to unexpected medical costs or loss of a job) you should immediately contact your mortgage lender’s Loss Mitigation Department. You may be required to show proof of your financial hardship, but it is possible that they can help you during such a dire time. You can also reach out to a housing counselling agency or foreclosure attorney to assist you in contacting your lender to arrange for alternate solutions to foreclosure.
You may qualify for one of the following:
Pre-Foreclosure Sale: While this would mean selling your home, it is better than having the home foreclosed upon you. Often, pre-foreclosure sales are for less than the house may be worth or less than what you owe. If there is a difference between the sale price and the remaining loan balance, the lender may seek a judgement to regain the remaining amount.
Mortgage Modification: If you are passed due but can resume making your normal payments—but can’t afford to repay what was missed—your lender may modify your mortgage agreement. The modification may add your past due balance back into the principal balance and continue the same monthly payment as normal (and slightly extending your loan term), it may completely adjust the monthly payment requirement to a more affordable level, or it may increase the loan term so that the payments are reduced but it will take you several years longer to pay off the house.
Deed in Lieu of Foreclosure: This option is much like returning the home in exchange for forgiving the debt. It will still affect your credit; however, not as severely as a foreclosure would.
For FHA Loans: If you financed your loan as an FHA Loan, you may be able to receive some relief from the FHA Insurance Fund. This program provides a single payment for borrowers who are at least 4 months past due but no more than 12. Also, the borrower must show that following the onetime assistance, they will be able to resume their regular payment schedule. Other conditions also apply to this option:
• You must sign a Promissory Note allowing HUD to place a lien on the property in exchange for the onetime payment from the FHA Insurance Fund.
• The FHA Insurance Fund payment is interest free but will have to be repaid eventually. Typically, it comes due when you pay off the loan or sell the property.
For VA Loans: Veterans also have their own program to provide financial services for VA homeowners to avoid foreclosure. This program is offered by the Veteran’s Administration Loan Center and details vary for specific situations.
Reinstatement: An agreement between you and your lender to provide a lump sum of payment to bring your account current by a specific date.
Forbearance: Depending on your situation and your lender, you may be allowed to delay payments for a short period; however, the account will have to be brought current once the forbearance period ends.
Repayment Plan: Your lender may allow you to catch-up on your missed payments by adding a portion of the overdue amount to several of your monthly payments until your account is reconciled.