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 How to Avoid Foreclosure
By: Darin "Sid" Cameron, CRS (with help from Russ Miller)
Wed, Mar 1st, 2006 2:18 pm

(Editor's Note: Much of the information in this article was provided to me by Russ Miller, a loan officer at Infinity Mortgage.  If you have questions contact us and we can forward them on to Russ.  However none of us are attorneys and we are not able to give you legal advice, sorry).

If you took out a mortgage loan when you purchased your home, you made an agreement to make regular mortgage payments on the loan to the lender.  When you don't make those mortgage payments, a process called foreclosure may occur.

Foreclosure is the legal means that your lender can use to repossess (or take over) your home. When this happens, you must move out and the bank takes over ownership interest in your home.

If your property is worth less than the total amount you owe on your mortgage loan, your lender (or HUD) could go to count and seek a "deficiency judgment" against you. A deficiency judgment is a court ruling obligating you to pay a sum that may be all or part of the remainder of your mortgage loan.  In other words, you not only lose your home but you also end up owing your mortgage company (or again, HUD) an additional debt.

At the same time, a foreclosure or a deficiency judgment could seriously affect your ability to qualify for credit in the future. That's why it's a good idea to avoid it if all possible!

How do you do that?

DO NOT IGNORE THE LETTERS FROM YOUR MORTGAGE COMPANY. If you are having problems making your monthly payments, contact your lender immediately and explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help. You should also stay in your home for now. You may not qualify for assistance if you abandon your property.

Some of your options include the following:

  • Special Forbearance
    Your mortgage company may be able to arrange a repayment plan based on your financial situation. If you have recently lost your job or your source of income (child support, etc) or if you had an unexpected increase in living expenses (medical bills, etc) your lender may even provide a temporary reduction or suspension of your payments. To qualify for this, however, you must furnish information to them to show that you would be able to meet the requirements of the new payment plan
  • Mortgage Modification
    You may be able to refinance the debt and/or extend the term of your mortgage loan to make the monthly payments lower. This is often a great way to help you catch up. Your qualification is often based on you having recovered from the financial problem but with a reduced net income that is less than it was before.
  • Partial Claim
    Your lender may be able to work with you to obtain an interest free loan from HUD to bring your mortgage current. You may qualify if:
    • Your loan is at least 4 months delinquent but no more than 12 months delinquent;
    • Your mortgage is not in foreclosure and
    • You are able to begin making full mortgage payments

Pre-Foreclosure Sale

  • If you risk foreclosure, many lenders will be willing to work with you to give you the time you need to sell your property and pay off your mortgage loan.  This can help you both avoid foreclosure and damage to your credit rating. Every lender has their own unique requirements for this.

Deed in Lieu of Foreclosure

  • As a last resort, you may be able to voluntarily "give back" your property to the lender. You still lose your home, but it will improve your chances of getting another mortgage loan in the future. Generally lenders only resort to this when loans are in default and you  don't qualify for any of the other options and have been unsuccessful in selling the house.

Because foreclosure is a serious business, you should consider consulting an attorney or housing counseling agency to get advice on which program best suits your needs. You should also discuss the situation with your lender/mortgage company.

This information deals with Chapter 7 consumer bankruptcy. Each state has its own bankruptcy laws, so you need to check with your state for details. Information dealing with Chapter 13 bankruptcy and consumer debt restructuring is not discussed in the above FAQs. The information contained in the following FAQs is provided for general information purposes only and is not intended to be a legal opinion nor legal advice nor is it intended to be a complete discussion of all the issues related to the area of Chapter 7 consumer bankruptcy. Every individual's factual situation is different and you should seek independent legal advice regarding specific information.

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Darin "Sid" Cameron spent 15 years working in the technology industry which in 1998 relocated him to St. Louis. In 2004 he took over web development tasks for Kimberly's real estate team and later became the full-time Marketing and Operations Director in 2005. In 2011 Sid launched two brokerages, The Realty Store, Inc. and Realty Referral Partners, Inc, while continuing to perform marketing and operations for Kimberly's team. Sid holds a real estate broker's license in Missouri, CRS certification and was the first CyberStar in the St. Louis area.
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