More often than not, a borrower’s (especially a first time borrower) plan to avoid foreclosure on their home consists of “make my payments on time”. While that is obviously an essential part of avoiding foreclosure, it is very important to have plans on how you’re going to roll with the punches if something happens like losing a job or an expensive illness in the family. You can’t always predict what the future will bring, so it’s good to make an effort to be prepared for a variety of situations. A little preparation can help you keep your home from being foreclosed on if you find yourself in a bad spot. Doing a little research on what resources are available when facing a default before you’re anywhere close to one gives you the tools to help protect you from foreclosure.
The first thing to remember is to be honest and open with your lender. Contrary to popular belief, your lender can be your best friend in a time when you’re facing foreclosure. The lender wants to avoid foreclosure as much as you do, because if you foreclose, it costs them a lot of money. A lender is also going to be much more willing to work with and trust you if you have been upfront and honest with him or her from the get-go. For example, if you lose your job, you should do three things: 1. tell your spouse, 2. make definitive plans and goals to get another job, 3. Alert your lender to your situation before you miss or make a payment late. Make sure to share with your lender your plans to find other work.
Your lender has quite a few options for assisting you, which they can (but are not obligated in any way) to use to help you avoid foreclosure. The first is to establish a repayment plan. In this plan, a borrower makes the normal monthly payment plus a little extra to cover the missed installments until the missed installments are paid off. The length and nature of the repayment plan is determined by the lender and the situation. A lender can also make a Special Forbearance, which is an agreement the lender makes to not initiate foreclosure to allow the borrower more time to pay back the missed payments. A Special Forbearance is essentially an unstructured repayment plan – it’s simply a due date, rather than a specified amount each month.
In addition, the lender can also modify the loan. Modifying the loan gives the borrower a fresh start, adding the amount of the missed payments to the loan balance and establishing a new payment schedule. Modifying the loan is similar in principle to a refinance. The lender can also agree to give the borrower time to arrange a private sale of the home, can agree to a short sale, and may also allow a Deed-in-Lieu of Foreclosure, which permits the borrower to forfeit the deed to their home rather than go through the foreclosure process. Deed-in-lieu is a little better on the ol’ credit score than a foreclosure, and takes a lot less time and work. Needless to say, it’s nice to have your lender going up to bat for you.
Outside of your lender, there are other resources to be aware of. The Servicemembers Civil Relief Act may grant you relief if the debt that is being paid off originated before your active service began. The SCRA can provide a lower interest rate for up to a year, provide forbearance and even prevent foreclosure or eviction for up to nine months from the time that military service ends. The SCRA can only provide assistance to servicemembers or veterans in a very specific set of circumstances, but for those it does help, it is a great arrow to have in the quiver.
For VA borrowers, the VA will also go to bat for you to help you avoid foreclosure in the event that the lender isn’t cooperating or can’t see anything that they can reasonably do on your behalf. The VA has eight Regional Loan Centers with Loan Technicians who specialize in working directly with the lender on your behalf to explore all possible options for avoiding a foreclosure. The VA Loan Technicians can take an active role in working with your lender to get the default resolved. In the end, though, none of these weapons can make up for general delinquency. Make sure that you’re consistently making your payments on time and put money away for a rainy day so that you can make at least one or two more payments even if your paychecks stop.