Understanding The Foreclosure Process And 10 Ways To Avoid It
Understanding the foreclosure process is vitally important for anyone in this situation. The purpose of this article is to go over that and talk about some creative ways to avoid it. Some of these tactics may be common sense but others might give you that “lightbulb” moment where you figure out how to avoid it.
Let’s dive in!
Understanding The Foreclosure Process
The foreclosure process can be confusing for a lot of people, and different lenders can have slightly different approaches to how they handle this. The bottom line however, is that lenders do not want your property and will do everything necessary to ensure they do not have to take it back (through foreclosure).
Lenders are in the business of lending and are not in the business of real estate. They want nothing to do with owning real estate, and it is very expensive for them when they must foreclose and take back a property.
According to RealtyTrac’s U.S. Foreclosure Market Report, as of May 29, 2020 there were 330,105 properties that were in “some stage of foreclosure” in the U.S. This is no small number by any stretch and indicates that foreclosure is a part of lending.
Another report from Attom Data Solutions, which compiles property data, shows that foreclosure activity is on the rise in 2021. This was to be expected because of the moratorium placed on foreclosures cause by Covid-19 in 2020, however it is rising at a high rate.
The Foreclosure Process
Here are the 5 steps in the foreclosure process that I put together based on info from Investopedia, HUD, and FHFA. I’ll summarize each step from those sources here and offer input from my knowledge of working in the lending world for years.
1. Payment Default
The first step in the foreclosure process is when a borrower fails to make at least one of their mortgage payments. Usually, mortgage payments are due on the first of the month, but they are not considered late until after the 15th of the month.
A missed payment will usually not get reported to the major credit bureaus (Experian, Equifax, and TransUnion) until it is over 30 days late, however there will still be a penalty due in most cases for paying after the 15th.
According to this guide from HUD (Housing and Urban Development), after the third missed payment, the lender will send a “demand letter” which is a letter stating you have 30 days to bring the mortgage current.
2. Notice of Default
A notice of default is usually sent after 90-120 days of missed mortgage payments. The company servicing the loan will then hand it over to their foreclosure department and according to FHFA’s (Federal Housing Finance Agency) Overview of the Foreclosure Process, the lender will typically give the borrower another 90 days to bring the loan current.
3. Trustee’s Sale
After 90 days from the notice of default, if the loan is still in default then a notice of trustee’s sale is recorded in the county where the property is located.
The owners’ name(s), property address, and where the sale is to take place will be printed in the newspaper as well, according to the FHFA. The property will then be awarded to the highest bidder who meets the requirements of the lender selling the property.
4. “Bank-Owned” (REO)
This is a lender’s worst nightmare and is what they try so hard to avoid, and that is becoming the owner of the property and having to sell it themselves (usually with the help of a broker or platform such as Hubzu).
Properties can be found on the MLS websites such as Zillow or Realtor.com from time to time that are being sold on behalf of a lender. From my experience, these properties are difficult to buy and there is lots of “red tape” due to how lenders take a while to make decisions on these types of properties.
Once the dust settles and the end buyer purchases the property, they will then want the occupants to vacate the premises. If this is not done peacefully then usually a sheriff will visit the property to remove anyone still there.
Summary of the Foreclosure Process
Throughout the entire foreclosure process laid out above, the lender will typically do everything in their power to not have to take back the property. Lenders employ lots of people specifically dedicated to helping borrowers to bring the defaulted loans current.
It is very costly and unproductive for a lender to have to foreclose on a property, so they attempt to avoid it at all costs.
Communication Is Key With The Lender
Communication and being willing to work with the lender is crucial when this occurs and will certainly help. In my past life as a loan originator, I worked with someone getting divorced who had to short sell a property and the lender was going to lose money.
He communicated this with the lender every step of the way and they were able to come to an arrangement where they set up a zero-interest loan to repay what the lender was losing (about $30,000) over a period of 5 or so years.
By doing this, it allowed him to maintain a good credit score and not have a foreclosure or short sale show up on his credit report. The lender even told him that because he communicated with them the entire time and was so willing to find a solution that worked for both sides, this is why they helped him out by doing this.
The Effects of Having a Foreclosure
Having a foreclosure on your credit is considered the kiss of death when it comes to obtaining another home mortgage in the future. The waiting period after having a foreclosure is 2-7 years depending on which loan program is used.
~FHA will require 3 years to have been passed.
~VA (Military Borrowers) will require 2 years.
~and Conventional Lenders (Fannie Mae and Freddie Mac) are the strictest and typically require 7 years.
A Foreclosure Stays On Your Credit For 7 Years
According to Experian, which is 1 of the main 3 credit bureaus that most lenders pull from (the other 2 are Equifax and TransUnion), the foreclosure will usually appear on someone’s credit after 1-2 months from when the lender initiates the process. It will then remain on the credit report for 7 years from the date of the first missed payment that led to the foreclosure.
How To Avoid Foreclosure Without Selling Your House
If you’re in a position where a foreclosure is looming, but you would prefer not to sell your house or are unable to sell, then this section is for you. We’ll go over different tactics that can be used to get current and avoid foreclosure starting with the easiest and least risky ways and moving to the more challenging ways.
The first step and most critical in all of this is to speak with your lender about your situation and always communicate with them. You should think of them as being on your side and on the same team as you, as opposed to being against you. The best outcome for both the lender and the borrower is to avoid foreclosure, so they are incentivized to work with you to ensure this happens.
After you have done this, here are some ways to avoid foreclosure without selling:
1. Use Some Creative Ways To Get Current
The simplest way to avoid foreclosure is to bring the loan current. Sounds very elementary and you’re probably rolling your eyes, but this is the truth. Since you cannot make money magically appear (if you can please let me know how), let’s discuss some creative ways that you might be able to make enough money to get current.
“House Hack” To Bring In More Income
House hacking is when you live in your home and rent out a portion of it as well. This is done to offset the mortgage and bring in additional income every month.
I began house hacking when I bought my first house in 2016 and started doing it with Airbnb in 2017. From August 2017 through the end of 2020, I brought in $58,159 through my Airbnb rooms alone. These weren’t entire house rentals, they were individual rooms. In addition to this, I had tenants living in other rooms on traditional 12-month leases. If that income is factored in, the amount I made from house hacking during this period was over $100,000.
Obviously, it is not ideal to have someone living in your home with you, but if you find a friend or someone you are okay living with then it can certainly help to bring in additional income and keep you from foreclosure.
Rent Out The Entire Home
It may be an option to move somewhere that is cheaper or even free. If this is the case, it could make sense to rent out the entire house while you are getting back on your feet. Check out Dwellsy if you want to do this.
Do Some Gig Jobs In Your Spare Time
Thanks to companies like Uber, DoorDash, Grubhub and Lyft, there are always ways to start a side hustle and bring in some extra cash. Getting started on these platforms is simple and you have the flexibility to do it as much or as little as you would like.
Before I entered the mortgage business in 2015, I drove for Uber and Lyft in my spare time to bring in some extra money. I did it when it was convenient for me and it was a great experience. I highly recommend doing something like this to anyone that has the ability to do so.
2. Get A Loan Forbearance
Due to the Covid-19 effect on our economy, many people entered into a forbearance agreement with their lender. This is when you temporarily pause or reduce your mortgage payments for a specified time period (usually 3-6 months). Here is a great resource where you can learn more about this and the steps you must take to get one.
Keep in mind that a forbearance does not eliminate these payments, it simply defers them to a later date. There are multiple ways to repay this amount that is deferred that you can learn about.
3. Obtain A Personal Loan
Getting a personal loan from a friend or family member is a great option as well to avoid foreclosure. Figure out the amount that you are behind and then you can request that from someone in the form of a loan. It can be humbling to have to ask someone close to you for money, but everyone falls on tough times at some point and people are typically compassionate about these things.
4. Do A Hardship Withdrawal From A Retirement Account
A hardship withdrawal is when funds are pulled from a retirement plan in an emergency (such as a pending foreclosure). Check out this article for more info on this topic. A foreclosure should certainly qualify as a hardship by the company that manages your retirement account.
This is a “last resort” type of thing because the money withdrawn cannot be put back into the account at a later date. Make sure you get all of the facts and specifics from whoever the retirement account is through before pursuing this option.
5. Seek A Loan Modification
Getting a loan modification involves speaking with your loan servicer and changing the terms in order to maintain the payments. Many borrowers were forced to do this after the recession in 2008 because they were in adjustable-rate mortgages (ARM’s) where the initial payment increased after a few years.
This article from Fannie Mae explains more about how a loan modification works and how it can be used. Loan modifications generally appear on a credit report and may negatively affect it, so again, make sure you understand exactly what this entails before speaking with your loan servicer about doing one.
6. Declare Bankruptcy
Filing for bankruptcy to avoid foreclosure is something that can be done as well. I definitely do not recommend exploring this option until all other options have been tried and exhausted. Having a bankruptcy on your credit will impact you for years as well.
This option typically just buys time and is not the ultimate fix. There is plenty of information that can be found online regarding this.
How To Avoid Foreclosure By Selling Your House Fast
Selling your house fast to avoid foreclosure is a route chosen by many people. By doing this, you can “beat the clock” and pay off the loan prior to the lender taking back the property. Here are some of the popular ways that this can be accomplished.
1. Sell To A Family Member Or Close Friend
This route is uncommon but involves a family member or someone you trust purchasing the home and then allowing you to rent from them in the meantime. Once you are back on your feet you can then purchase the home back from them.
Again, this is uncommon and not feasible for a lot of people, but I have seen it be done before and it can be a great way to sell the house but continue to live in it.
2. Work With An Investor-Focused Realtor*
I put an asterisk next to this option because there are some conditions. Working with just any realtor is likely not a good strategy. Finding a realtor who focuses on working with investors is the best way to go about this. They’ll be able to give good insight and advice as to how to sell the house quickly.
Many realtors will advise sellers that they need to fix and update the property way more than they need to. When a foreclosure is looming, there is very little time to do any of this, and it also costs money. So having a realtor that has experience dealing with properties being sold as is can be very beneficial and lead to a good outcome.
3. Do A Cash Home Sale To An Investor
Working directly with an experienced investor can be a great way to sell your house for cash, on your terms and avoid foreclosure.
Great real estate investors are very creative and can deal with complex situations and offer solutions. Going over your situation with a few experienced investors can likely lead to some potential solutions that you didn’t even think were possible. Just make sure you are working with a good investor that you trust, and not a wholesaler, because they will waste your time.
4. Consider Trying A Short Sale
I would consider this the worst-case scenario here, but it is better than getting foreclosed on. Here is an article that goes into detail about what a short sale is and the process. To summarize, a short sale is when a lender agrees to the borrower selling their house for less than what the loan balance on the property is.
The lender will take a loss, but they don’t have to go through the process of foreclosing on the property and they don’t incur all of the fees and headaches associated with that.
From my experience in the mortgage business, short sales can take a long time and there is lots of “red tape” associated with it. At the end of the day, the lender must approve of the short sale for this to even be an option, and lenders are not known for being fast decision makers!
If this is something you are considering, it is best to find a local real estate agent who is an expert in dealing with these types of transactions. They will be able to assist and guide you through the process.
Facing a foreclosure is a scary thought, but there are options to avoid it. And if you do end up getting foreclosed on, it is not the end of the world. I have seen multiple people go through a foreclosure and end up back on their feet with fantastic credit within a few years.
Reach out if you have any questions and I hope you got something from this article!