If you’re struggling to afford your mortgage and you start missing payments, you put yourself at risk of foreclosure. The last thing you want is to lose your home, so it’s important to take what steps you can to avoid foreclosure.
In some cases, refinancing your mortgage can reduce your loan costs, which could help you avoid foreclosure. As a last-ditch effort, you may be able to modify your loan, sell your home, or even sign it over to your lender and at least walk away debt-free. Here’s what you need to know.
- The longer you wait when facing foreclosure, the more difficult it usually becomes to refinance your mortgage.
- Additional options that let you keep your home include loan modification, forbearance, a reverse mortgage, or bankruptcy.
- Options where you don’t keep the home but are released from your mortgage debt include short sales and deed-in-lieu of foreclosure.
When Can You Refinance To Avoid Foreclosure?
Refinancing is when you take out a new loan to replace your current loan. Most homeowners refinance to get better terms on their loan, such as a reduced interest rate or to borrow their equity.
Since refinancing involves applying for a new mortgage, you will have to meet the borrower requirements for that loan, and pay closing costs on it. If you’re having financial problems, it may be difficult to qualify for a new loan, depending on the type of mortgage you have.
In general, the longer you wait to refinance your mortgage, the more difficult it will be to do so.
Before you miss payments
The best time to refinance your loan to avoid foreclosure is before you start missing payments.
Remember that refinancing your mortgage means applying for a new loan and using the proceeds to pay off the old one. You want to be in the best possible position financially when you refinance. If you’ve missed no payments, you’ll have stronger credit and be more likely to qualify for a better loan.
After you miss payments
Once you miss a mortgage payment, you still can refinance your loan, but it likely will be more difficult to do so.
Look at it from the mortgage lender’s point of view: You’re already struggling to pay your current mortgage, so why would you be expected to afford payments on a new one?
If you do find a willing lender, your credit score will be lower due to the missed payment, which may mean that your refinance loan will have a higher interest rate.
Preforeclosure is the beginning of the foreclosure process. When you miss your first payment, your lender will consider your loan delinquent, and may consider the loan to be in the preforeclosure phase. You still can work with your lender to come up with a plan to cover the unpaid loan amount, fees, and accrued interest to avoid foreclosure.
Four months — 120 days — after you miss your first payment, your lender can begin the foreclosure process. At this point, refinancing becomes incredibly difficult, if not impossible. If you continue to miss payments, almost no lender will be willing to offer you a loan. Your only option may be a predatory foreclosure bailout loan with high fees and rates.
Once the lender completes the foreclosure process, you’ll no longer own the property, and you’ll likely face eviction. Because you don’t own the property anymore, you can’t use it as collateral for a new loan — meaning you can’t refinance.
In some cases, you may be able to get your home back through the right of redemption. In certain states, even after your home is put up for auction following foreclosure, you have a grace period in which you can pay the full balance of your mortgage, including accrued interest and fees, and get back your home. This will be difficult, considering your damaged credit and financial situation, but it may be possible.
Other Options To Avoid Foreclosure and Keep Your Home
Even if you’ve missed payments and you’re facing foreclosure, you still have options that will let you keep your home.
A short refinance is a new loan you can take out on your home even if you’re underwater, which means your mortgage balance is greater than the value of the home.
it’s difficult to refinance without sufficient equity, and if you’re underwater — also known as negative equity — it may seem near impossible. But if you find a willing lender, a short refinance can let you adjust the term and interest rate on your loan to lower your monthly mortgage payment.
In some cases, you can do a short refinance with your existing lender, and ask that it forgive a portion of the balance. Some lenders may be willing to do this to avoid the cost of foreclosing on your home.
Mortgage loan modification
Mortgage loan modification involves asking your lender to make your loan more affordable by changing the terms of your current mortgage without refinancing it.
As in any negotiation, there’s a chance your lender will refuse, but there’s little harm in asking. The worst-case scenario is you’re in the same position that you started in.
There are many ways to modify a loan to make it more affordable. Asking for a lower interest rate, a longer loan term, or a reduction in the mortgage principal all can lower your monthly payment.
If you’re close to being able to afford your mortgage payment, a loan modification may be a way to reduce that bill enough to make it affordable.
If you’re facing a temporary financial hardship, forbearance might be the right option for avoiding foreclosure.
Forbearance pauses or temporarily reduces your mortgage payment, giving you time to get back on your feet. During forbearance, you typically won’t have to worry about penalties or fees due to nonpayment.
However, you will have to make up those payments — either by increasing the amount of future payments or by extending the term of your loan.
If you default on your mortgage by missing a payment, you can avoid foreclosure through mortgage reinstatement. It’s essentially a fancy word for covering your missed payments.
When you miss a payment, a 120-day timer starts. Your lender must wait that long before it can start foreclosure. During this time, the lender may send you a mortgage reinstatement letter. If you can pay the amount you missed, plus late fees and interest, as well as continue to make your regularly scheduled payments, your lender will reinstate your loan and bring it out of default.
The mortgage reinstatement letter will include the amount you have to pay, and the process you should follow for making payments.
Foreclosure bailout loan
A foreclosure bailout loan is a specialized loan designed to get you cash quickly and help you avoid foreclosure. Typically, these loans are large enough to refinance the entire mortgage, but in some cases, they’re only large enough to help you reinstate the loan.
A foreclosure bailout loan can be risky. If you’re facing issues with making your current mortgage payments, adding a new loan to the mix — especially one that typically comes with high rates and fees — may be a stopgap measure at best.
You can use the funds from a reverse mortgage to pay off your current mortgage, or to supplement your income with regular payments. The loan gets repaid when you no longer live in the home.
The downside is each payment reduces your home equity, leaving you with less profit to keep or pass on to your heirs.
Avoiding foreclosure if you’re in financial distress is difficult. One option may be to file bankruptcy.
“Bankruptcy is a tool to stop the foreclosure and give the homeowner options,” says Ashley Morgan, an attorney in Herndon, Virginia. “A Chapter 7 can stop a foreclosure and sometimes give a homeowner time to either apply for a modification or sell their property. A Chapter 13 will stop the foreclosure and allow the homeowner to get caught up on his mortgage over the course of three to five years. It also can allow for the homeowner to also simultaneously apply for a modification to allow for multiple options.”
Keep in mind that filing for bankruptcy is a last-resort option, and can be expensive given the lawyer and court fees. You’ll also see a massive drop in your credit score, which can take years to rebuild.
“Right now, since interest rates are on the rise, many people have been filing for Chapter 13 instead of getting approved for modifications,” Morgan says. “Many modifications are offered at current interest rates, so if someone locked in a lower interest rate in the past 10 years through a purchase, refinance, or prior modifications, being offered a modification at 7% to 8% interest is not appealing.”
Other Options To Avoid Foreclosure Without Keeping Your Home
In some cases, the best solution may be to give up your home — and the debt associated with it — so you can walk away in the best possible financial situation.
A short sale usually happens when you owe more on a mortgage than the home is worth. You’ll work with your lender to sell the property, and turn over the proceeds from the sale to pay off your loan in full. In many cases, the lender will write off the difference between what it receives from the sale and the remaining loan balance, leaving the seller debt-free.
While a short sale avoids foreclosure, which significantly damages your credit, it will not let you keep your home, which makes it one of the last options you should consider.
Deed-in-lieu of foreclosure
Like a short sale, a deed-in-lieu of foreclosure will not let you keep your home. However, it can help you avoid foreclosure and wipe away your remaining mortgage debt.
This process involves signing over ownership of your home to your lender to avoid foreclosure. Make sure to ask that it forgive the entire mortgage balance as part of the agreement. If the lender is willing, you’ll transfer the home to the lender and be free of your mortgage payments.
FAQ: Refinancing Your Mortgage To Avoid Foreclosure
Here are answers to some common questions about refinancing your mortgage to avoid foreclosure.
If you have equity in your home and are facing trouble making your mortgage payments, you could use a home equity loan or reverse mortgage to help cover your monthly payment. Just keep in mind that you’re taking on more debt and adding another monthly payment to your budget, which can make it even more difficult to make ends meet.
Loss mitigation is a series of steps that lenders take to help borrowers avoid foreclosure. Examples of loss mitigation include loan modification or forbearance.
Some of the most common reasons people struggle to pay their mortgage and face foreclosure include losing a job, increased credit card or medical debt, divorce, or the death of a spouse or partner.
The Bottom Line on Refinancing Your Mortgage To Avoid Foreclosure
If you’re at risk of missing mortgage payments, it’s in your best interest to take steps to avoid foreclosure sooner rather than later. The sooner you act, the easier it will be for you to refinance your loan and secure a good interest rate. However, if you’ve already missed a payment or two, don’t lose hope. Take the time to work with your lender and consider the strategies you can use to avoid foreclosure.
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