Foreclosure

Foreclosure summary:

• Foreclosure is the legal process by which a lender takes possession of real estate when a borrower has defaulted on their loan. 

• Generally, a borrower must be at least 120 days (four months) behind on payments before a lender can start the foreclosure process. 

• If you’re struggling to keep up with your mortgage, communicate with your lender. They may offer a hardship program to help you get back on track financially and avoid foreclosure. 

Foreclosure definition and meaning 

Foreclosure is a legal process in which a lender takes possession of a mortgaged property after a borrower defaults on the loan.The next step would typically be for the lender to sell the property to recover the money that’s owed. 

If you stop paying your mortgage and miss several payments, your lender may initiate a foreclosure. If you can’t afford to make your mortgage payment, you should contact your lender right away to talk about the options that could help you avoid losing your home. 

Foreclosure: a comprehensive breakdown

A foreclosure can be devastating. Besides causing emotional distress, having a foreclosure on your credit report could make it challenging to qualify for financing in the future. A foreclosure can stay on your credit report for up to seven years. 

Missing one mortgage payment won’t trigger a foreclosure. But missing several payments could put you at risk. Generally, a lender won’t initiate a foreclosure until a borrower is at least 120 days (four months) behind on payments. 

You can’t settle mortgage debt. You have to find a way to get caught up on payments, even if that means selling the home to satisfy the loan. 

If you’re struggling to afford your mortgage payments, don’t give up hope. The best thing to do is contact your mortgage lender right away, before missing a payment. Many mortgage lenders offer hardship programs to help you stay on track with payments and keep your loan in good standing. In some cases, the lender might even consider modifying the terms of your loan in such a way that it makes the loan more affordable for you.

Here are some ways to avoid foreclosure. 

Forbearance

Many lenders allow borrowers to apply for a forbearance, which could provide a temporary payment pause. If you’re eligible and approved for a forbearance, it could give you some breathing room to sort out your finances. But it’s only a temporary solution. 

One thing to be aware of is that even if your lender allows you to skip one or more payments, you might be expected to get fully caught up on those payments once the forbearance ends. 

For example, let’s say your payment is $1,500 a month and your lender’s hardship program allows you to skip three payments. If the program has a payment catch-up requirement, you’ll have to make a $6,000 payment in month four. This kind of hardship program isn’t appropriate for all situations.

Bankruptcy

Filing for bankruptcy temporarily stops all collections, including foreclosure. When you file for bankruptcy, the courts will issue an automatic stay. This means creditors must stop contacting you to collect debts. This could give you more time to get your personal finances in order so you can catch up on mortgage payments. 

Loan modification

If you're having a hard time paying your home loan, your lender might be willing to change the terms. Mortgage modification changes the terms of your loan to make payments more affordable, such as by lowering the interest rate. Loan modifications are rare.

Debt relief

Debt relief means negotiating with your creditors to accept less than the full amount you owe, but consider it payment in full. 

To be clear, debt relief is not an option with mortgages. Unsecured debts like credit card debt, loan debt, and medical debt are good candidates for debt relief. 

If your budget is strained, resolving unsecured debts could help you get back on your financial feet. For example, if you get rid of credit card debt or medical debt, that could free up money to keep up with your mortgage payments.