Barbara Sadler: Can I Sell My House To Stop Foreclosure?

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

Formally, a mortgage lender (mortgagee), or other lien holder, obtains a termination of a mortgage borrower (mortgagor)’s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).

Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that they can repossess the property.

Therefore, through the process of foreclosure, the lender seeks to immediately terminate the equitable right of redemption and take both legal and equitable title to the property in fee simple. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowner association dues or assessments.

Selling a Foreclosed Home: What You Can Do

Selling a foreclosed home is an option many homeowners who have defaulted on their loan don’t know much about. Foreclosure is a long and heartbreaking process for a homeowner. But, it’s not hopeless. When looking for a solution to defaulting on their mortgage payments, many owners float this question: “Can I sell my home if it is in foreclosure?” The short answer is yes.

Up until the home is sold at auction, you can rescue your home by selling it and paying the lender everything you owe, including back payments and penalties. And in some states, you are allowed a “statutory right of redemption.” This is essentially a take-back period after the foreclosure—from 30 days to as much as two years in some places —in which you can repurchase your home.

How does foreclosure work?

A foreclosure starts when the homeowner is issued a notice of default after your fourth missed payment. The whole process can take from six months to one year or more, depending on the negotiations between you and your lender.

Selling a foreclosed home after foreclosure has begun

You can sell your home up until it is sold at auction or the bank takes possession of your house. During this period of time, the home is considered to be in “pre-foreclosure” and you can try to settle your debts with the lender.

One way to avoid foreclosure is to sell your home (with the help of an experienced agent) and net enough to pay off everything you owe the lender, including back mortgage payments, penalties, and fees. You won’t own your house anymore, but you won’t have the house foreclosed upon, which would do serious damage to your credit.

If you decide to sell, tell your lender that you plan to list the property for sale with the intention of paying off the mortgage. Ask the lender to postpone a foreclosure auction or sale and give you a chance to find a buyer.

Of course, making the decision to sell sooner than later will take some of the pressure off the deal and allow you more time to get the best price for the property. Make sure you ask the lender how long you have before the property will go on the auction block. It all depends on which state you live in. In some states, a lender can auction off a property in less than a month; in others, lenders can’t auction off a home for more than a year.

Hire a real estate agent

When time is of the essence, hiring a real estate agent should be your first priority so you can figure out how much your home is worth. A good agent can run a market analysis to help you anticipate how much money your home will fetch and if it’s enough to pay off the mortgage.
A real estate agent can also negotiate with lenders to reduce the amount they’ll take in a short sale to rescue the property from foreclosure.

Short sale to the rescue

Lenders hate foreclosures because, even for them, they are legal, financial, and PR headaches. That’s why some lenders agree to a short sale, where you sell your home for less than everything you owe.
Agreeing to a short sale is a desperate action for a lender to take. Lenders don’t want to lose money on mortgages, but they also don’t want to spend their time foreclosing on, owning, and selling property.

So, after you spend a lot of time filling out paperwork and explaining how you got into this financial predicament, you might be able to persuade your lender to work with you on a short sale. Short sales avoid foreclosure and the huge hit your credit score can take as the result of a foreclosure.

The worst thing you can do when you fall into mortgage arrears is attempt to hide from your lender.

Lenders will find you or start foreclosure proceedings if they can’t. It’s much better to call your lender, explain your financial problem, and beg for mercy and a little more time to catch up on your payments or to refinance.

If that isn’t feasible, here are other ways to rescue your home:

• Restructure the loan: Some lenders will restructure your monthly payments and allow you to repay missed payments over time. They might also allow you to reduce your interest rate.

• Ask for forbearance: Your lender might agree to reduce or suspend your payments temporarily to give you time to sort out short-term financial difficulties (e.g., waiting for your new job to start).

• Search for money: Make sure you’ve liquidated everything you can before losing your home. Can you raise money by selling a car and taking public transportation? Pawning jewels? Cleaning out closets and selling items on eBay or Craigslist? Also, consider asking your parents or other flush family members and friends for a loan or gift. Make sure you draw up papers so everyone is clear about the details of the loan and repayment schedule.

• Find new ways to save: Go over your monthly budget with a magnifying glass and see where you can save money, and brainstorm about how you can earn more. Maybe you can find a temporary second job, or earn money on weekends by baby-sitting or walking dogs. This is the time for everyone to pitch in and pinch their wallets.

• Foreclosure Workout. Up until the time your home is scheduled for auction, most lenders would rather work out a compromise that would allow you to get back on track with your mortgage than take your home in a foreclosure.

• Short Sale. After your lender files an NOD but before they schedule an auction, if you get an offer from a buyer, you lender must consider it. If they foreclose on your home, the lender is going to simply turn around and try to resell it; if you present them with a reasonable short sale offer, they may see it as saving them the time, effort and trouble of finding a qualified buyer in a soft market. So, if your home is on the market, continue to aggressively seek a buyer for it, even after your lender initiates the foreclosure process. Read our guide on how to Sell Your Home Fast When Foreclosure Looms for action steps you can take to unload your home fast, then make your best pitch as to why your lender should agree to the short sale.

• Bankruptcy. Bankruptcy stops foreclosure dead in its tracks. Once you file a bankruptcy petition, federal law prohibits any debt collectors, including your mortgage lender, from continuing collection activities. Foreclosure is considered a collection activity, and so the day your lender becomes aware that you have filed for bankruptcy, the foreclosure process will effectively be frozen. But here’s the rub; once you get to court, the bankruptcy trustee’s role is simply to play referee or mediator between you and your creditors. Bankruptcy really just buys you more time to replace your lost job or recover financially from a temporary disability; it doesn’t let you off the hook for your debts. The law requires your mortgage company and other creditors to work in good faith with you to formulate a reasonable repayment plan so you can get back on track. Consult with a bankruptcy attorney regarding whether filing for bankruptcy is a good strategy for you.

• Deed in Lieu. A deed in lieu of foreclosure is exactly what it sounds like. The homeowner facing foreclosure signs the deed to the home back over to the bank — voluntarily. These sounds like it would be a great option, but actually has the same impact on a homeowner’s credit that foreclosure does. Lenders are very reluctant to agree to take a home back through a deed in lieu of foreclosure for a number of reasons: They fear the homeowner will sue later alleging they didn’t understand what was happening, the lender must pay any second or third mortgages or home equity lines of credit (HELOCs) off before executing a deed in lieu, and the lender wants to be certain that the borrower’s financial distress is real. Allowing the foreclosure process to proceed is one way the lender can be sure the borrower is not faking poverty.

As such, a deed in lieu of foreclosure is virtually never granted unless: foreclosure is imminent; the owner has had their home on the market for several months and been unable to sell it; there are few or no junior loans or liens the lender will have to pay off; the seller can document their financial hardship; and the seller initiates the process and documents the voluntary nature of their request for a deed in lieu. Even when all these factors are present, many lenders will not agree to a deed in lieu, but it is worth a try!

• Assumption/Lease-Option. Most loans these days are no longer assumable. The average mortgage now contains a “due on sale” clause by which the borrower agrees to pay the loan off entirely if and when they transfer the property. However, if you are facing foreclosure, you might be able to persuade your lender to modify your loan, delete this clause and allow another buyer to assume your loan. The lender may want to assess the new buyer’s qualifications, but it can be a win-win-win option for all. You might be able to negotiate a down payment from the buyer which you can use to pay off your outstanding past due mortgage balance.

In a lease-option scenario, the buyer becomes your tenant, and you continue owning the property until the buyer has saved enough down payment money, improved their credit sufficiently or sold their other home. In some situations, the buyer will make a one-time, lump option payment upfront, paying you to obtain the option to purchase your home. You can apply the option payment to bringing your mortgage current. Then, the buyer will make lease payments monthly which you, the seller, then apply to your mortgage. To successfully use a lease-option to stop the foreclosure process, you must negotiate lease payments that cover most or all of your mortgage payment, property tax and insurance obligations — enough that you can make up any difference and still pay to live somewhere else.