How to stop foreclosure: Understanding your options

It's a heart-wrenching situation when you've invested your time, money, and effort into making a house a home, only to face the possibility of losing it. 

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Unexpected financial hardships can sometimes jeopardize your ability to keep the home you've grown to love—but they shouldn't have to. If you're at risk of losing your home following mortgage delinquency, this article will help you to understand your options and navigate how to stop foreclosure. 

What is foreclosure?

Foreclosure is the legal process mortgage lenders use to repossess or sell a property once the borrower has defaulted on the loan agreement. 

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If you've missed a single monthly mortgage payment, there's no cause for alarm. Although it's not good practice—and can harm your credit score—the foreclosure process doesn't happen immediately. In fact, you have a good deal of time to be proactive and avoid foreclosure if you've gone delinquent. 

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The foreclosure process is as follows:

• Mortgage delinquency (30 days past due): You'll receive a demand letter, also called a notice to accelerate. This is a formal request to bring your balance up to date within 30 days. 
• Notice of default (90 days past due): This is generally considered pre-foreclosure and a final warning to get current on your mortgage. 
• Foreclosure proceedings (120 days past due): The formal process varies from state to state. Be sure to read up on regulations in your area to understand how quickly proceedings occur.  

How to stop foreclosure

You have options when it comes to keeping your home. Available solutions will be based on how far you are into the foreclosure process. Therefore, it's always good to consult a legal advisor when weighing your options. 

Ask for a repayment plan

If you had a temporary setback due to financial hardship but are now back on your feet and ready to resume paying off your mortgage, a repayment plan is a solution worth discussing with your lender. 

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A repayment plan will help you get current without the stress of paying all missed payments in one lump sum. Instead, your past-due balance will be divided into smaller payments and evenly added to your regular monthly payments. Your loan server will need to approve and set the plan, so it's essential to contact them as quickly as possible. 

Enter forbearance 

When hardship strikes, it can be difficult to cover a large expense like a mortgage payment—and just as difficult to know when you'll be ready to resume those payments. Mortgage forbearance allows homeowners to pause regular monthly payments for a designated period to remain in good standing with their home loan. In addition to preventing foreclosure, it helps alleviate immediate financial pressure. 

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Eligibility varies from loan servicer to loan servicer. However, you'll likely be required to submit proof of your financial hardship. At the end of your forbearance period, you'll be on the hook for all missed payments—either in a lump sum or through a repayment plan. 

Leverage your 401(k)

If you've saved for retirement and have a decent nest egg, a 401(k) hardship withdrawal can be a lifeline. Hardship withdrawals allow you to dip into your retirement account to cover an "immediate and heavy financial need." One qualifying hardship is covering expenses to prevent foreclosure or eviction. You can generally withdraw enough to meet the cost of the hardship. 

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It's not a loan, so there's no repayment. However, failing to make catch-up contributions later can severely impact your financial security come retirement. 

Apply for a reverse mortgage

A reverse mortgage is worth exploring if you're a homeowner over 62 who wants to age in place. It's a popular equity financing tool that allows you to tap into your equity for cash and pay off your delinquent mortgage balance. There are no monthly payments. Instead, the loan is due in full when the borrower passes away or sells the home.

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Reverse mortgages are considered tricky, so you should weigh the pros and cons before proceeding. The most severe risk is that failure to meet the loan's terms, such as paying property taxes, homeowner's insurance, and maintenance costs, can lead to foreclosure. Depending on the reasons for a missed mortgage payment, it can still be possible to qualify for a reverse mortgage when you have a delinquency. 

Opt for a deed in lieu of foreclosure

If keeping your home is not a priority or you’re open to downsizing, you can voluntarily turn your property over to a lender and avoid foreclosure proceedings. In some cases, this will allow you to break free of the debt tied to the property. Just be sure to ask your lender if you'll be liable for any outstanding balance on the mortgage. 

Conduct a short sale

Consider moving forward with a short sale. While not ideal, a short sale allows you to sell your home at less than its current market price. The lender then takes the proceeds and forgives your remaining debts. Once the home is sold, a short sale preemptively ends the foreclosure process.  

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Selling a home with a lien or outstanding balance can be challenging, so be sure to work with an experienced real estate agent. 

Talk to a HUD-approved housing counseling agency

The Department of Housing and Urban Development (HUD) sponsors agencies that provide expert advice or loss mitigation counseling. They aim to help you stop foreclosure at little to no cost. You can find official counselors here. 

Refinance with a hard money loan

Hard money loans are secured loans offered through private lenders and are generally based on the value of your property, not your creditworthiness as a borrower. Their high interest rates and fees make them an expensive—and temporary—solution to foreclosure. Hard money loans should be treated as a last-ditch effort and approached with caution if considered. 

Bankruptcy: a last resort

Bankruptcy is intended to give you a financial fresh start—but it also has very significant consequences. It's always best to discuss bankruptcy with a financial advisor before proceeding. 

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You can file for bankruptcy and keep your home. However, the conditions and requirements vary depending on the chapter that you file.  

How to avoid foreclosure

Carefully tracking your cash flow and setting a budget is the best way to avoid going delinquent. However, unexpected hardships are not uncommon. So, here’s how to be proactive and prevent foreclosure: 

Build an emergency fund

Experts recommend setting aside 3 to 6 months' worth of living expenses in order to safeguard your finances. When urgent or unplanned situations arise, you’ll be covered without resorting to debt or delinquency. To accomplish this, set aside a small percentage of your income from every paycheck moving forward. 

Talk to your lender

The sooner you take control of the situation, the easier it will be to prevent foreclosure. Communicating with your lender should always be the first step when you’ve gone delinquent. Although asking for help or reaching out to discuss your options may feel intimidating, foreclosure is a timely and costly process—one that your lender likely wants to avoid. By reaching out at the first sign of trouble, you can mitigate escalation. 

Ask about a loan modification

If you can't refinance, a loan modification is a great alternative. Similar to a refinance, your loan terms change, ideally lowering your monthly payments so they're more affordable. The change can impact your rate and term lengths for the duration of your loan. 

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A loan modification works well when your financial situation has changed and your budget is stretched thin. By proactively changing your loan, you can ensure that you don't fall behind. 

Consider a home equity investment

If you haven’t hit the 30-day delinquency threshold, a home equity investment (HEI) is another tool at your disposal. With an HEI, you get access to cash in a single lump sum payout in exchange for a share of your home’s future appreciation. There are no monthly payments, rather, you repay the investment anytime during a flexible 30-year term with a home sale, refinance, or savings.

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HEIs are attractive because they have no age, income, or debt-to-income ratio requirements. Instead, you need sufficient equity and a credit score above 500. This is particularly beneficial for self-employed homeowners or those with less-than-great credit. You can use the funds for any purpose—catching up on a missed payment or even getting ahead. 

Final thoughts

Financial hardship shouldn’t impact your ability to remain in the home you love. When facing foreclosure, it's important to remember there is hope. You can navigate this challenging obstacle by taking control of your situation and exploring your options. 

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If keeping your home is your priority, connect with one of our equity experts today. Point’s Home Equity Investment (HEI) allows homeowners to tap into their equity to get their finances back on track.