How do I stop foreclosure?

The most common problem people come to see about is foreclosure. Knowing you might lose your home in foreclosure is scary, but there are a lot of ways we can help you get back into good standing on your mortgage so we can keep you in your house. In this post I run down some of the options out there:

1. Try for a loan modification. In our opinion, most of the loan mod programs out there are nearly worthless. HAMP can be a good fix for a homeowner behind on payments, since it reduces monthly payments AND puts your loan back into good standing. But since there's no way to force lenders to comply with HAMP, most people are left out in the cold (and pushed into foreclosure). It's been very rare to see a homeowner get a HAMP modification, but that doesn't mean you shouldn't try it, hoping to catch the right person on the right day and catch a lucky break.

As for the lenders' "internal" modification programs, your guess is as good as ours whether you'll qualify.  Since the criteria and terms of these mod programs are usually secret, you're at the lender's mercy. So if you go this route, negotiate and negotiate hard. Even though the customer service rep on the phone might not realize it, the bank is probably going to lose a lot of money if they foreclose on you. Show them why. It might be helpful to order an appraisal--if the lender knew your house was $100,000 underwater, they might not think it's such a good idea to kick you out of it.

2. Don't hire loan modification sleazeballs. If foreclosure is the number one problem we see in our office, 1A is people who have paid sleazy loan modification outfits to help them stay out of foreclosure. These programs are expensive, and most of the time they just don't work. In particular, stay away from: 1) out-of-state companies (it's harder to get your money back), 2) companies that tell you to stop making your mortgage payments; and 3) for-profits that ask for a large up-front fee without telling you what they can do for you or how they can do it. So many people get caught up in these scams, and it only creates a bigger mess to clean up once the scammer runs away with the money and leaves you right where you started or worse.

3. Consider Chapter 13 reorganization. Chapter 13 is a way to force a lender to accept repayment of your arrears over time. It's ideal for the person who missed a bunch of payments, but now has the income not only to make the payments, but also to catch up and stop foreclosure. Chapter 13 allows you to pay your mortgage arrears in equal installments over a three- to five-year period. It can be surprising when a lender refuses to let you catch up on your mortgage, even when it knows you have the income for it. This way you can call the shots and force them to accept your money.

4. Strip off your second mortgage. If you didn't have to pay your second mortgage, could you afford to catch up on your mortgage? As of earlier this year, in a Chapter 13 reorganization we can strip second mortgages (and third mortgages, and fourth...) where the value of the house is less than the balance of the first mortgage. It's called lien stripping. To do this, we need an appraisal to prove the value of your home. Once we can prove that your second mortgage is fully unsecured, we can strip the lien in Chapter 13.

5. More people have just been moving on. If you can't afford your mortgage payment, can't qualify for a modification, and bankruptcy won't help your situation, it's time to make some hard choices. If you have an underwater house, meaning you have no equity, what do you really own? And if you have to pay $10,000 just to get back into good standing, is it really worth it? If you decide to abandon a home to foreclosure, you can usually live in the house mortgage-free for at least six months while the foreclosure runs its course. For many of our clients, this is just enough time to save up some money to make the transition to a new place to live comfortably. And if you have a second mortgage that won't go away in the bankruptcy, well we can usually wipe that out in Chapter 7.

Is a short sale better than foreclosure?

The short sale industry has been a huge windfall for real estate agents. Some of them scare people into short sales on their home, even though a short sale usually has no advantages over letting your house go into foreclosure. Why do they do this? Simple, it's the fees. Realtors stand to make up to 6 percent from the short sale of your home. On a $200,000 house, that's a tidy $12,000 for the realtors ($6,000 for the seller's agent, $6,000 for the buyer's agent) . Turns out, that's just about enough incentive to pressure you into a short sale, even when there's no benefit to you. 1. Most short sales are no better for your credit score than foreclosure. Both short sales and foreclosures are major credit events that can have a big impact on your score. But there's no support for the myth that a short sale is easier on your credit than a foreclosure. In fact, FICO, the leading credit-scoring company, says the opposite. If you compare a borrower who goes into foreclosure with a borrower who does a short sale where there is a deficiency balance, the credit impact is the same. If the second mortgage company will agree to wipe out your balance, then yes, the credit hit from a short sale may be softer. But this isn't what usually happens.

2. Your realtor probably can't wipe out your second mortgage, despite what he/she tells you. For people who have second mortgages, short sales can be tricky. Remember, in Minnesota, a second mortgage company can sue you after foreclosure for any remaining balance left on their loan. A lot of times, the second lender will release their lien if they can get a few thousand bucks from the closing of the sale, but won't release your liability on the loan. This benefits the buyer, because they can buy the house without the lien, but it doesn't do anything for you, since the second mortgage company can still ask you for the remaining balance. So there's no benefit for you--you're on the hook for practically the same amount of money as if you had gone into foreclosure.

3. Foreclosure may suck, but it has its advantages, too. Short sale has a big disadvantage over foreclosure that your realtor will probably forget to tell you. If you sell your house, you'll probably have to leave within a month or two. If you just let your house go into foreclosure, you may have between six months and a year to live in your house mortgage-free and rent-free, while the foreclosure runs its course. That's a lot of time to save up some money for whatever comes next--such as a security deposit and moving expenses. If you short sell your home, you'll be giving up this right.

4. Don't get caught by the details. I know, I know. Most realtors are honest. But when it comes to short sales, there are a lot of sleazy operators out there who'll tell you anything to get you to sell. We've heard lots of cases of realtors telling the client one thing, and when they get to closing, the deal is totally different than they were led to believe. If you're thinking of a short sale, you probably need an advocate who's working for you, not for the commission. We represent homeowners in trouble with their mortgages. We also review short sale documents to make sure you're getting the deal you think you are. Give us a call to talk about your situation.

The foreclosure process in Minnesota

The foreclosure process is a mystery to a lot of homeowners. So here's a timeline that explains how foreclosure by advertisement works (as opposed to foreclosure by lawsuit, which is rare, and has a completely different timeline). Keep in mind that your timeline may vary, sometimes by a lot.

Month 0: You miss a payment. The whole process kicks into motion when you can't make payments on your mortgage anymore, or decide not to make payments. At first the mortgage lender might start calling you or writing you letters. The lender might also reach out to see if you need assistance or if you're eligible for a loan modification. At some point you'll receive a default, or "intent to foreclose" letter. But remember that from this point, you still have a lot of time before the foreclosure actually happens.

Month 3: Your case is sent to an attorney. It's usually about three months of missed payments before your file is sent to a foreclosing attorney. It could be less, it could be more. The attorney might take a couple of tries to get you to start making payments again, usually by calling you or writing threatening letters.

Month 4: Service and publication. In foreclosure by advertisement, the lender must serve you with foreclosure papers. The papers will tell you the date of the sheriff sale, which must be at least six weeks in the future. Then the lender has to publish a foreclosure notice in the newspaper for six consecutive weeks. If the lender skips any of these steps, or doesn't complete them correctly, the foreclosure may later be attacked in court.

Month 6: The sheriff's sale. The sheriff's sale is a really important date, for two reasons. First, it is the last date you can bring your mortgage current in order to stop the foreclosure. After the sale, it might not be enough just to pay the lender the amount you're behind.

Second, after the sheriff sale is completed, we can no longer use bankruptcy to help you catch up on your mortgage. If your sheriff's sale is scheduled for 10 a.m. on Monday, and we file your bankruptcy at 9:59, the sale is void. If it's filed at 10:01, we've missed our chance.

Under Minnesota law, a homeowner can also delay a sheriff sale one time for five months, in exchange for a shortened redemption period to five weeks (see below). This must be done between the date the sale is first published and 15 days prior to the sale. The process isn't all that easy, so don't wait until the last minute if you want to postpone your sale.

Month 12: The end of the redemption period. The redemption period is a six month period starting from the date of the sheriff's sale. During the redemption period, you can continue living in your home. By this time, it's too late to get the mortgage current by paying past-due payments, but you can "redeem" the property by paying the entire sheriff's sale amount plus interest and fees anytime before the redemption period expires.

Month 13: Eviction. Eviction is the final step in a foreclosure. After the redemption period has ended, if the lender wants get you out of the house, it must file for an eviction in court. This usually takes about a month to complete. People don't usually like to be evicted, so most people move out of the house on their own sometime after the redemption period ends.

No matter where you are in this process, we can help you determine your options, including litigation and bankruptcy. If you want to talk more about how to prevent foreclosure, call us at (612) 564-4025 or email us.