Facing up to Foreclosure: A Consumers Guide

There are many reasons homeowners face difficulty in making mortgage payments: unexpected expenses, loss of overtime, unemployment, overspending, illness/injury, disability, death, marriage, childrearing, divorce, education, and relocation.

Whatever the reason, it is important to be informed of all available options and to act quickly.

You may have the misconception that the lender wants to take your home back through foreclosure. This is not true. The vast majority of lenders are only interested in seeing that payments are made each month as agreed in the mortgage terms. As a general rule, lenders only begin foreclosure when all else fails. They look for ways to assist you when you are having financial difficulty, but their ability to help declines with each missed payment. Therefore, it is extremely important to address the crisis as soon as it occurs and to keep the lender informed at all times.

Step #1: Statement of the Problem

The first step is to develop a statement of the problem. This should be very clear so the lender understands exactly why you are now, or will be, delinquent.

  • Identify the problem: Briefly summarize the overall situation and be specific as to how it happened. In other words, clearly explain what caused you to fall behind on your mortgage payments. Provide any and all documentation you can to back up your statement.
  • Prioritize: List your specific financial problems starting with the most serious need first. For example, if you are late on your mortgage, list this first. Then list other needs, i.e., car, phone, credit cards, etc.

Your statement of the problem is one of the most important factors in obtaining the help you need from your lender and other creditors. Always be honest and realistic, and provide documentation.

Step #2: Personal Financial Assessment

Completing a personal financial assessment will help you determine exactly what your financial circumstances are and enable you to make a realistic determination of what payment arrangements are feasible for you.

Step #3: Equity Calculation

In addition to your Statement of the Problem and your Personal Financial Assessment, you need to determine how much equity you have in your home. This may help you decide whether you intend to keep your home at all costs. It is essential to understand the concept of equity and how it might affect your decision.

Primary Options for Consideration

Depending on the results of Steps 1, 2, & 3, there are many things the lenders can do to help you resolve the delinquency. The most common methods used to bring loans current are as follows:

Reinstatement (Cure): The easiest way to cure a delinquency is to pay the lender everything is owed. This includes missed payments, any late fees associated with these payments, and any other fees which the lender charges as a result of your delinquency. The reinstatement period varies from state to state. In California you have the legal right to reinstate your loan up until 5 business days prior to the trustee’s sale.

Repayment Plan: This is a written agreement between you and the lender to help you make up missed payments. Generally these agreements require higher payments than the regular monthly mortgage amount for a short period of time, until the loan is brought up-to-date. You must not agree to a payment plan you cannot honor; but you must be willing to pay what you can realistically afford. If you fail to meet the terms of this agreement, you will probably receive no additional help from the lender.

Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance — only available in extreme hardship situations). Modifications are not easily granted and there must be strong, justifiable reasons for the request.

Forbearance Agreement: The lender will allow you a period of time (3 to 6 months generally) during which to make either lower payments or no payments at all. Unless the loan term is extended, later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date again.

Special Forbearance: (Applicable to FHA-insured loans only) The lender may allow partial payments for up to 18 months to allow the borrower to get back on track. The lender may also offer “partial claim”, or advance funds, to help you become current.

Refinance: This will usually not be an option if you are seriously delinquent on the current mortgage (more than 3 payments late). If you are current, however, and there is equity in the property, this might be an option.

Second Mortgage (Equity Loan): Possible even if you are seriously delinquent if there is enough equity in your home. Not generally feasible when you are having trouble making first mortgage payments – a higher interest rate and another payment would only be compounding the problem. May be used to eliminate consumer debt.

Bankruptcy: While this may seem to be the most unpleasant option, it may allow you to save the property. A Chapter 13 bankruptcy may help you save your home from foreclosure if all other options have failed. You will need to consult a bankruptcy attorney. Legal advice is always recommended prior to filing.

Secondary Options for Consideration

It is important and realistic to consider other options if you cannot afford to or don’t really want to keep your home. This could occur when your situation changes so much that you cannot make the payments that you have been making. It can also occur when there is no equity in the property. Suppose you bought your home in 1990 for $158,000 and today your mortgage balance is $148,000. A Realtor informs you that the value of your home has declined to $140,000, you might decide not to keep it.

Foreclosure: You may decide not to, or may not be able to, make any more payments. When this happens, the lender will foreclose and take your home. The amount of time this takes varies from state to state. In California, this process takes approximately 4 months from the recording of the Notice of Default.

NOTE: Some states allow the lender a deficiency judgment for the difference in value between the mortgage balance and any loss the lender might suffer where property values have declined. In California there is no deficiency judgment allowed on foreclosure of purchase money mortgages (the one you use to buy your home) but there may be deficiency judgments on refinanced home loans, VA loans, or junior lien loans (2nd mortgages). Deficiency judgments are very rare.

Deed in Lieu of Foreclosure: This option, which must be done with the lender’s permission, means you deed your home back to the lender. This saves the lender money and time and you avoid having a foreclosure on your credit report.

Short Sale (Pre-Foreclosure Sale for FHA-insured loans): In this case you will petition the lender to allow you to sell the house at its current market value which is less than the loan balance. If the lender agrees, you can enlist the aid of a realtor and try to sell your home even though the purchase price will be less than the outstanding balance. A lender may agree to a short sale because if the property is foreclosed upon, the lender will have to sell the house anyway. With a short sale, you save the lender time and foreclosure expenses by finding someone who wants to buy your house.

Your choice of how to handle your delinquency may affect your credit report. A foreclosure will remain on your credit report for 7 years. If you choose to let your home go back to the lender through foreclosure, you should keep accurate records of your attempts to resolve the problem. Assuming the rest of your credit is good, you should be able to buy another home in 2 years. If you choose deed-in-lieu or short sale, negotiate with the lender to re-age your credit report to remove the derogatory information and bring your account current.

NOTE: Be sure to consult a tax specialist to discuss the tax implications of whatever option you pursue. In foreclosure, there are usually no tax implications other than possible capital gains if you have owned a home before and have rolled your gain into the property being foreclosed. When you use a deed-in-lieu or short sale and there is negative equity, you may be responsible for ordinary income taxes on the amount of the debt that the lender forgives (difference between your mortgage balance and the value of your home). Please check with your tax specialist.


If you miss mortgage payments, the lender can decide to begin the foreclosure process. In California, this occurs between the 60th and 90th day of delinquency. First a document called a Notice of Default will be recorded with the County Recorder’s Office and a copy of the notice will be sent to you. This notice actually starts the foreclosure process, which generally takes several months.

You may bring your loan current by making all the missed payments, late fees, and any other charges accrued. Bringing the loan payments current will cure the default and the loan will continue as if the payments had never been late. The loan may be brought current at any time up to five business days before the actual sale date. If the default is not cured by paying all back payments plus costs, or by making some other agreement with the lender, your home will be sold at auction to the highest bidder, usually the lender.

After foreclosure occurs, you will have no further options and will have lost all rights of possession and ownership to the new owner. The lender (new owner) can then proceed to evict you following normal eviction procedures just as if you were a tenant who had not paid rent. This process can be completed in just a few weeks.