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Complete Foreclosure Guide: How to Avoid Foreclosure?

Getting a foreclosure notice is one of the most shocking and depressing things in life. If you have received a foreclosure notice or are behind on your mortgage payments and are fearing a foreclosure, here is a complete guide on all you need to know about foreclosure and how to avoid it.

What is a Foreclosure?

Foreclosure is when the lender takes possession of your property to recover the amount you owe them because you have failed to keep up with the mortgage payments.

While purchasing the house, you agree to pay a certain amount periodically to the lender. When you fall behind payments due to financial distress, the lender is legally allowed to take possession of the house and recover the amount you owe them which you agreed to when you signed the mortgage agreement. Because you also agreed to make regular mortgage payments, default on payments is a breach of the mortgage payments which can lead the lender to take action.

Why Lenders Go for Foreclosure?

Lenders can send you intent to foreclosure notice after one or two missed payments. However, after 90 days of non-payment, they have a legal right to start the foreclosure processing. At this point, only if you make all the missed payments at once, you can stop foreclosure processing. Most people who miss their mortgage payments for one or two months, cannot pay 3 months’ payments by the end of the third month at once.

To end the problem sooner, you can get a hold of your finances and pay the owed amount if possible. For instance, if you have lost your job, borrow money from a friend or relative to pay down the amount because you’ll find a job later. So, you can pay back your friend and pay the rest of the mortgage payments as decided.

But in some situations, if you cannot see yourself making the same income in the future, because you suffered a huge business loss, or are about to get a divorce, you can move on to tips and tricks that will help you avoid foreclosure or get the best outcome even when the foreclosure happens or you sell the house.

Ways and Hacks to Avoid Foreclosure

Forbearance Agreement

If the financial distress in your life is temporary, you might be eligible for a forbearance agreement. Forbearance agreements let homeowners have a certain period, at the end of which, they are supposed to pay the amount owed or reach a settlement. For example, the lender can agree to a forbearance agreement if you pay all the missed mortgage payments at the end of 5 months.

Apply for Loan Modification

The foremost option to keep the house and avoid foreclosure is to apply for a loan modification. Because you are unable to pay your mortgage payments, it might be easier to make payments if they are reduced. For example, you might have to pay a monthly mortgage payment of $1300 for 30 years. By going through a loan modification, the lender might increase your repayment period to 40 years so you can pay $975 in monthly mortgage payments.

Lenders can lower your mortgage payment to roughly 31% of your gross monthly income when you apply for a loan modification. They might lower your interest rate so that you’ll now have to pay around 31% of your income in mortgage payments. If you are earning $3000 a month, it can be lowered to $930 monthly.

Similarly, tax appeals can help you lower your mortgage. For instance, if you live in an area where residents have to pay higher taxes because of being near to public schools, you can apply for a tax reduction if your kids are not attending school.

Loan Reinstatement

After 90 days of mortgage payment defaults, the mortgage lender can start foreclosure proceedings against you. But if you apply for loan reinstatement before the end of 90 days, in the pre-foreclosure period, your lender might agree to it. Depending on your lender and your situation, the loan reinstatement would allow you to have a forbearance agreement that lets you pay the amount owed over some time in future. However, when the foreclosure phase starts, some lenders would not budge depending on the situation. Therefore, as soon as you can take a hold of your situation and talk out a plan to pay the owed amount, the higher your chances of avoiding the foreclosure.

Start Early

Missing payments can lead to additional fines and fees. If you are already behind payments and are receiving phone calls or notices from the lender, it is best to start exploring your options as soon as possible. The earlier you will gather your documents and get in touch with a foreclosure expert and lender, the higher the chances of avoiding foreclosure.

Even if the lender is proceeding with the foreclosure process, there are several ways to stop it. One of which is the 37-day rule. According to the 37-day rule, the lenders cannot sell the house even when they were actively pursuing the home foreclosure, if the homeowner submits a request for loss mitigation 37 days before the scheduled date of foreclosure. 

Be Aware of Dual Tracking

Your lender can proceed with foreclosure while your loan modification request is pending. There have been situations where people’s houses were sold in foreclosure while they were told their loan modification request was in process to distract them from what was actually happening. Dual tracking had been very common in the past and many people lost their homes when banks and lending companies fraudulently sold them.

Although Consumer Financial Protection Bureau (CFPB) has set up rules to protect homeowners and illegalized dual-tracking foreclosure, some homeowners who are not aware of it become victims of dual tracking. So, to avoid foreclosure, it is important to send an application for a loan modification as soon as possible, taking advantage of the 37-day rule.

Dealing With Debt Collector’s Phone Calls

Whatever you say on a debt collector’s phone calls can be used against you as they are recording the calls. So, if your debt collector calls you and says you owe a certain sum to the mortgage company and asks you how you’ll pay it, don’t acknowledge what they have just said. If you call to talk about a mortgage payment, insurance, or anything else, don’t disclose other types of information.

Additionally, if they are trying to get you to agree to what they are saying or trying to discuss something, ask if you can meet them in person. Never acknowledge the debt under any circumstances on a phone call that is being recorded.

Robo Signing

Robo-signing can include a variety of illegal practices to move forward with the foreclosure through signing paperwork. The two most common types of robo-signing include; signing someone else’s name on a legal document and signing one’s (bank employee’s name) own name on a foreclosure affidavit without verifying the information about the mortgage.

The federal regulators, in 2010, found thousands of tainted mortgage documents that were related to homes in foreclosure. Laws were set in place to protect homeowners. Now robo-signing is illegal and punishable by law.

The legal abuse by the banks and loan industry is widespread. Therefore, if your house is in foreclosure, you need to be aware of your rights and the malpractices. If you suspect Robo-signing leading to foreclosure of your home, you can file a complaint to CFPB to summon the mortgage lender to provide all the proof related to foreclosure processing.

Avoid Hurting the Credit Score

A foreclosure can knock off 100 or more points from your credit score and can stay on your credit report for up to seven years. To avoid hurting your credit score in the process, when you receive the notice of intent to foreclosure, you have to respond with a debt validation letter within 30 days. A debt validation letter puts them in a situation where they have to provide evidence that you owe them a certain amount of debt.

It is crucial to start repairing the credit or avoid hurting it while you are in the foreclosure phase. After foreclosure, when the credit points are lowered it will be time-consuming and expensive to get your credit back on track. We live in a world where our credit report is a necessity. Nowadays you don’t just need a good credit report to secure an auto loan or get another credit card. To rent out an apartment, the landlords can ask for your credit report to look at how responsible you are at paying your immediate obligations. So, a good credit report and a high credit score are crucial to living a contented life.

Foreclosure and Divorce

Divorce foreclosures are one of the most complex and emotional situations you can be stuck in. It becomes one big chain of professionals where you will be connected to a divorce attorney who is connected to another divorce attorney, who is connected to a bankruptcy lawyer, connected to a real estate lawyer who is connected to several more professionals and attorneys.

It is important to hire a divorce lawyer who is also versed in dealing with real estate matters and foreclosures to make sure that they protect your interests. In the event of foreclosure, one partner can suffer the consequences of foreclosure when their credit is ruined while the other walks out with a high credit score. Divorce foreclosures are delicate situations where you need to hire an attorney who helps you get the best outcome for you in every way.

Possible Outcomes

Oftentimes, a foreclosure expert can predict the possible outcomes of a situation for you. In some cases, a loan modification or reinstatement might work out? While a short call or foreclosure might be the only option for some. The outcome highly depends on your situation, how farther it is in a foreclosure proceeding, and who your lender is.

For instance, you and your neighbor can be in the same situation where you both have the same lender, same debt, and missed payments. But the outcome might be different for both because there are a lot of variables that decide whether your loan modification or reinstatement application will be accepted or not. 

Increase Your Income

Most of the time, the default on mortgage payments is because of financial distress. You either lose your income or your expenses increase. Prices of everyday goods and energy bills go up every year because of inflation. When your income doesn’t increase with increasing expenses, you have a higher chance of falling behind on bills and mortgage payments. Late or missed mortgage payments can also be a result of loss of employment or a troubled marriage or relationship.

Whatever the reason is for financial distress in your life, you need to get a hold of your finances and work out ways to get back your financial freedom. To live a happy life, you don’t just need to pay the bills and debt. You need to have a certain level of disposable income each month that you can put towards your pension fund, investment, or spend on buying things that make you happy.

A good rule for budgeting your finances each month is the 50-30-20 rule. So, you can spend around 50% of your income on your needs, 30% on wants and 20% goes in savings. The wants refer to the happy hours where you buy things that make you happy, go out for dinner or lunch a few times a week, go to the movies, and short vacations. Your life can feel stale without this financial freedom. 

To avoid missing mortgage payments, you’ll need to take steps to improve your income. This might mean a side hustle, freelancing, consultation side business, renting out your property, or setting up a second income stream. A survey conducted by Morning Consult found that 46% of Americans considered themselves to be struggling financially. 

Financial stress can limit your ability to enjoy life. To reach financial freedom you might have to make life-changing decisions but it can improve your life in ways you couldn’t have imagined. 

Final Note

Even when your home loan is underwater, there are plenty of ways to avoid foreclosure and ensure the best outcome for you. Meet a foreclosure expert as soon as possible and start early. The earlier you begin, the higher chances you’ll have of avoiding foreclosure.

When you start to receive phone calls and foreclosure notices from the lender, it can be a daunting task to face them. But getting engaged with the lender and getting the right advice from your attorney or a credit expert is crucial to saving your house from going into foreclosure. Make sure that you reach out to an experienced and trusted credit advisor or financial expert who helps you get the best outcome in your particular situation. 

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