The First Six Things to Do When You're Facing Foreclosure

Being foreclosed on is a scary experience—but try not to panic.

Buying a home is a huge step in the average person’s life. A home purchase is typically the largest asset any of us will ever own, and most people need a pretty big loan in order to pull off the transaction. The numbers in your mortgage documents can be eye-wateringly, heart-palpitatingly large, but we usually rationalize that down to an affordable monthly payment that gets us out of the hole—and into 100% equity—in a few decades.

But what happens when our lives change and those monthly payments aren’t affordable anymore? The property you bought with your mortgage is what’s securing the loan, so once you fall a few months behind on your mortgage, your lender may initiate a foreclosure process. That basically means they take possession of your house and sell it to get their money back. When you receive the first notice that your lender has started that process, you might be tempted to give up. Don’t—there are options left to explore, and plenty of work you can do to improve your situation. Here are six things to do right away if you’re being foreclosed on.

Research

The first thing you need to do is learn everything you can about your situation. You’re not powerless, and there may be moves you can make—but you need to know what those moves are. Start with:

• Mortgage documents and correspondence. First, review your actual mortgage docs, which will detail how your lender handles delinquency and foreclosure. One key thing to look for is a “power of sale” clause, which is where the lender claims the right to sell the property if you default on the loan—make sure you understand the details laid out there. Next, review all the correspondence the lender has sent regarding late payments, and make a note of any options listed in there that might be useful to you.

• Local laws. Every state has its own laws governing foreclosure—get to know yours. This way you’ll know if your lender is acting within the bounds of the law, and you’ll know how much time you legally have to respond, and whether a short sale of your house will satisfy the debt or if you could be held liable for other costs. Look for a “right of redemption” as well, which in some cases gives you the right to reverse the foreclosure process if you can come up with the cash owed to “cure” the loan.

• Government programs. The federal government offers some programs that can help people avoid foreclosure, including the Making Home Affordable (MHA) program and the Hardest Hit Fund (HHF), which can lower mortgage payments or give financial aid to people struggling to pay their mortgages. Getting involved with programs like this can help you convince your lender that foreclosure is unnecessary.

Talk to your lender

Once you’re armed with some information, it’s time to open up lines of communication with your lender. Most lenders would prefer not to foreclose—it’s a lengthy and expensive process for them. They’d much rather keep getting monthly payments from you. So do the following:

• Figure out what you can afford. Step one is to know what monthly payment you can manage. Be realistic—calculate a number that lets you keep up with your other bills.

• Contact your lender. In the notices sent to you will be a contact person for your lender—call them. Request a loan modification, and make it clear you’re willing to work with them. Tell them what you can afford, and see what can be done. Your worst-case scenario here is that they say no, and nothing changes.

• Keep records. Note every call you make and letter you send, ask for everyone’s name and other information when you speak with them, and always ask that they record the time and date of every call in their records. Being able to demonstrate your efforts to make good on the loan and work with your lender is vital.

Talk to a counselor

While you’re talking to your lender and exploring alternatives to foreclosure, contact the Department of Housing and Urban Development (HUD) and look into speaking with a housing counselor. This is a free service, and the counselors can outline your options and offer advice on how to proceed. Their website also provides information on local counseling services to avoid foreclosure.

Lay the sale groundwork

Despite your best efforts and sincere intentions, it may not be possible to stop or significantly modify the foreclosure process. You should start preparing for that eventuality now, even if you hope to modify the loan and get back on track. Getting ready to sell the house in a short sale (selling it for less than you owe on the mortgage) before your situation becomes an emergency will allow you to get the best possible deal with less stress.

First, get a comparative market analysis (CMA) on the home. This gives you the market value of your home based on similar home sales in your area. Find a local real estate agent who has experience doing short sales and get them involved—not all real estate agents know how to navigate one. Finally, ask your lender about the procedure for requesting a short sale (they have to agree to one) and the likelihood of getting one approved.

Monetize the house

A foreclosure situation means you’re dealing with some sort of budget crisis. Whether it’s a lost job, sudden unexpected expenses (like a medical emergency), or an adjustable interest rate skyrocketing, a foreclosure means you’ve fallen behind on your bills. While you’re doing everything you can to understand and avoid the foreclosure process, you still own the house, and that means you can potentially monetize it to help your financial situation.

This could include adding roommates and collecting rent, or renting out the whole house or just parts of it using something like Airbnb. You can also monetize amenities like a pool or a backyard to bring in some extra cash, or sell all that stuff you have lying around. The specific opportunities will depend on you and your unique situation, but even if losing the house to foreclosure is inevitable you can at least help soften your landing post-foreclosure.

Consider bankruptcy

Finally, if you’re dealing with a foreclosure action in motion, do some research on filing bankruptcy. There are a lot of downsides to bankruptcy proceedings—most notably the impact on your credit and finances—but the bankruptcy process can freeze foreclosure proceedings, and possibly give you more avenues to deal with your mortgage debt. This is an extreme option, but you should start learning about the process in your specific area and what it can achieve the moment you’re informed of a foreclosure coming. Hopefully, you won’t have to go down this route, but as in everything else in life, knowledge is power.