How to avoid foreclosure on your home

For many people buying a home, getting the keys and walking through the front door represent the culmination of a dream and a wellspring of optimism for the future. They don’t see trouble on the horizon. Unfortunately, sometimes life gets in the way of our vision. If you’re struggling with your mortgage, we’re here to help. Let’s walk you through how to avoid foreclosure, whether by staying in your home or getting a new start.

13 ways to help avoid foreclosure

Foreclosure can be physically, emotionally, socially, and financially painful. Losing a home leaves a void that isn’t easily filled. It’s better for everyone, lender and servicer included, if you manage to stay in your home. If a house payment just isn’t in the budget in the long run, we’ll also go over alternatives that would allow you to gracefully exit your home.

When you really need the help, mortgage servicers can look into your situation and determine whether there are available options for payment assistance. It’s very important to note that outside of specific situations like the aftermath of a natural disaster, any relief you receive will have a negative impact on your credit score and report because you’re not making the payments according to your loan terms, so keep that in mind.

If you’re having a hard time with your mortgage payment, we suggest reaching out to your mortgage servicer as a first step. This is the entity you make your payment to and may or may not be your lender. If you’re a Rocket Mortgage^® client, get in touch by signing into your Rocket Account and navigating to the Mortgage tab > Help > Payment Assistance. In any case, your servicer will evaluate and attempt to qualify you for relief.

1. Prioritize your spending

Before thinking about changes to your mortgage, take a good look at your budget and other areas. Is there anything you can remove like cable or other subscriptions? Think about meals at home rather than eating out.

Cutting things that are discretionary may go a ways, but the other thing to check into is whether you can defer or postpone payments on other things like cell phones, vehicles, and utilities. See what the policies of your providers are. Because your home is so important to your livelihood, it needs to be prioritized in your budget.

2. Refinance before trouble

While it involves taking out a new loan, refinancing to lower your mortgage payments could be a viable option to put you back on more solid financial footing long-term. But you have to do this before missing any payments to give yourself the best opportunity to qualify. Although a rate-and-term refinance often makes the most sense, taking cash out to consolidate debt might also improve your budget.

Your lender will review your full financial profile, including your credit score, income, and assets to determine whether you qualify and the terms of the potential new mortgage.

3. Reinstatement

Mortgage reinstatement involves bringing your loan back to current status again by paying all past-due amounts in a single lump sum. Although this isn’t always possible, it’s the fastest way for clients who have suffered a temporary lapse in income to get back on track with their mortgage. An example of this in action would be making the payment after an employer comes through on the promise of backpay.

4. Mortgage forbearance

If your hardship will be resolved within a few months, you might qualify for a mortgage forbearance. Mortgage forbearance is a temporary pause or reduction in your payment. However, anything not paid during forbearance needs to be paid back at the end of the forbearance. It’s intended to give short-term relief.

After your mortgage forbearance agreement is in place, and you’re able to make payments again you and your servicer will work together to schedule your past due payments or to look into qualifying you for alternatives to make up missed payments and become current again.

It’s important to note that forbearances do have negative credit impact and should only be used if you cannot make your mortgage payment. The sooner you communicate with your servicer, the better.

5. Repayment plan

A repayment plan allows you to avoid the burden of a lump sum payment. A specific portion of the past-due amount is added to your payment until the back payments are paid off. Terms vary, but the typical time frame is 3 – 6 months.

6. Deferral  

Depending on the investor in your mortgage loan, you may have the option of a deferral or partial claim. In this scenario, you will resume making payments immediately. Any missed payments are made up when the loan is paid off. Investors do have limits regarding the number of months that can be deferred to the back end of the loan.

7. Partial claim

A partial claim is similar to a deferral in that you just pick up your regular payment. But instead of extending the term, the missed payments are incorporated into a second mortgage that’s due when you refinance, sell the home or otherwise pay off your loan.

8. Short refinance

Your lender may consider a short refinance if you’re seeking relief because you’re upside down on your home loan, meaning you owe more on your mortgage than the home is worth. In this arrangement, the lender refinances your loan while forgiving a portion of your prior balance. An appraisal is done to verify the current home value. Rocket Mortgage doesn’t provide short refinances.

9. Mortgage modification

Mortgage modification involves changing the terms of your loan to bring you current by adding the past-due payments back into your unpaid principal balance. As part of this, your interest rate and/or term may change. Once your servicer finalizes the details, you can see how this impacts a revised amortization schedule.

10. Pay off the home in a sale

If you can’t come up with a plan that allows you to stay in your home, the next best thing you can do is sell the home and pay off the balance. You get to keep anything left over, which would help you in securing your next place. There is also no negative credit impact from doing this, which is a bonus.

11. Short sale

When a lender approves the sale of a home for less than the balance owed on the mortgage, it’s called a short sale. This is used when a homeowner can no longer stay in the home, but they owe more on the home loan than the home is worth. The entire process is managed by the lender or servicer. In exchange for keeping the home up, the lender may provide cash consideration.

In some states, the lender can pursue a deficiency judgment against you for the difference between what the property was sold for and the remainder of your balance. They may agree to waive this. If they do, ask them to put it in writing.

12. Deed in lieu of foreclosure

When you do a deed-in-lieu of foreclosure, you voluntarily sign over your property to the lender or servicer. The lender has to agree to this as they would a short sale. However, you can receive a monetary payment. The same rules regarding deficiency judgments would apply depending on state law, so make sure you’re clear on whether you’re being granted a waiver.

13. File for bankruptcy

If you’re staring down foreclosure, filing for bankruptcy can pause proceedings while you’re getting your finances in order. Any communication with your lender or servicer goes through attorneys and they have to follow the pause in proceedings required if an automatic stay is issued. What happens next depends on the type of bankruptcy filed:

• Chapter 7 bankruptcy involves a total wipeout of included debts. If your house is included, foreclosure would eventually move forward. You also have the option of reaffirming the debt. This would allow you to work with your servicer to see about keeping the house.
• Chapter 11, 12, and 13 bankruptcies involve debt reorganization in a payment plan. As part of this, there may be an agreement with your servicer about your mortgage.

How to avoid foreclosure: FAQs

The possibility of foreclosure feels stressful and overwhelming. We’ve tried to put together a list of common questions you may still have.

How long is the foreclosure process?

The mortgage loan must be delinquent for at least 120 days before a lender can begin foreclosure, with certain exceptions. The length of the foreclosure process varies by state. In some states, the process ends when the home sells at auction. However, in other states, homeowners can exercise the right of redemption even after the home has been auctioned.

What if I can’t stop a foreclosure?

Government agencies or nonprofits may provide housing counseling services for free or at a reduced cost. This may help you get your finances in order and provide resources to help you find your next living arrangement.

What are the consequences of foreclosure?

The most difficult consequence of foreclosure is that you lose your home. But there are others. You’ll have to wait 2 – 7 years to get a new mortgage, depending on the loan option. Additionally, your credit score can drop by 100 points or more, mostly depending on how high your score was prior to the bankruptcy.

The bottom line: Act to avoid foreclosure

If you’re struggling with your payment, it’s important to communicate with your servicer as soon as possible so they can work to help you stay in your home. If that’s not in the cards based on your situation, they can work with you to facilitate an orderly exit that may include a payment to help you relocate. Foreclosure should always be a last resort.

Rocket Mortgage clients experiencing difficulty can contact us through their Rocket Account by going to Help > Payment Assistance in the Mortgage tab.