Navigating Financial Hardship: Foreclosure Prevention for Homeowners

September 26th, 2023

Financial hardship can arise suddenly, putting your most valuable asset – your home – at risk. While foreclosure may feel like an alarming prospect, strategic action can help protect your home even in difficult circumstances.

This guide provides practical steps to recognize and respond to financial distress, whether you are just beginning to struggle or are already facing foreclosure proceedings. It suggests ways to work with lenders to request relief, find available government assistance programs, and seek expert guidance to prevent foreclosure. By being proactive in their efforts and using key resources, many homeowners can overcome short-term economic challenges that can lead to foreclosure prevention.

Gaining a deeper understanding of the definition, causes, and consequences of economic hardship can help you effectively manage your situation and seek appropriate solutions. The process requires persistence, but taking control is essential to preserving your home in a crisis. There are options available if you act quickly and understand the system.

What is financial hardship?

Financial hardship, defined as the inability to cover your basic living expenses, can make meeting financial obligations extremely challenging. Financial hardships can happen unexpectedly, even to homeowners who have been financially responsible.

A job layoff, medical crisis, death in the family, or other emergency can disrupt even the most carefully crafted budget and financial plan, rapidly depleting economic resources.

It's important not to blame yourself if you end up facing financial upheaval that’s no fault of your own. Focus instead on addressing the situation proactively.

What are the early warning signs of financial hardship?

Quickly recognizing when you’re facing financial hardship is critical. Red flags include calls from creditors, frequent declines of your credit or debit card, and non-sufficient funds notices from your financial institution. These experiences result from you being over the limit on credit cards, relying on them constantly to purchase essentials, and being forced to make only minimum payments on them. More dire warning signs include making car or housing payments late or missing them altogether. These all signal emerging economic instability and require your prompt attention.

It's easy to ignore initial signs of financial hardship, especially if you're scared or embarrassed about what they might mean. But recognizing the signs in a timely manner gives you more options for changing course before your financial situation becomes unmanageable. Carefully monitoring your finances can alert you to problems while they're still fixable. Track monthly expenses, bank, and credit card statements to catch negative spending patterns early.

Once hardship becomes apparent, respond quickly. Thoroughly evaluate your budget and reduce unnecessary spending to free up cash flow. Making temporary lifestyle changes like dining out less, cutting entertainment costs, and postponing major purchases can help you stretch your limited funds (read our blog post on how to reduce unnecessary spending). Using these economic damage control tactics can help prevent outcomes like credit card cancellation, car repossession, or foreclosure.

If you’re already too far behind on your mortgage payments or have received a notice of foreclosure, then you’ll need to take prompt action to save your house.

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Meet SUN Homeowners Ed & Paula

After 30 years in their Springfield, Massachusetts home, Ed and Paula never imagined that they’d fall behind in their mortgage payments and face eviction. But then serious health issues struck and sent their financial security into free fall. BlueHub SUN was able to negotiate to buy and sell the home back to them with a new affordable mortgage and a shared appreciation mortgage that reflects the savings they got on their loan. 

Read more about Ed and Paula's story

Immediate Foreclosure Prevention Steps to Take

Facing imminent foreclosure can be overwhelming but acting quickly can help you avoid losing your property. By promptly contacting lenders, exploring government and nonprofit assistance programs, or alternatives to foreclosure, you may find options to prevent it. Here are some steps to take for foreclosure avoidance.

  1. Pursue refinancing or loan modification

    If you have missed or at risk of missing mortgage payments, reach out to lenders to modify your loan terms, or refinance your mortgage with better terms that work for your budget. Whether you can successfully negotiate these options with a conventional lender often depends on your economic situation.

  2. Explore lender financial hardship options

    Many lenders offer temporary relief programs. If you’ve already missed mortgage payments, call your lender right away, explain you’re experiencing financial hardship and request reduced or suspended payments through forbearance.

  3. Investigate government assistance programs

    If you’re struggling to negotiate with your lender, consult a HUD-approved housing counselor to assess alternatives like hardship assistance grants or alternative and nonprofit lending programs, like BlueHub SUN. They also can help you avoid mortgage relief scams.

  4. Consider a pre-foreclosure or short sale

    If you want to sell your home before foreclosure happens, consider a pre-foreclosure or short sale. This sale happens when a struggling homeowner sells their property for less than they owe before the lender begins foreclosure proceedings. The lender accepts the home’s sale amount as full payment for the house, even if it's under the mortgage value. In most states, the lender consents to not pursue you for any remaining or deficiency balance after the sale. Certain states prohibit lenders from collecting mortgage deficiencies following short sales, while in other states, you must negotiate with the lender to waive the right to the deficiency balance. You can still do a short sale if you’re in foreclosure, and like with any other home sale, you agree to leave as part of the deal.

  5. Evaluate a deed in lieu of foreclosure

    Homeowners who want to give their home back to the bank before they foreclose could consider a deed in lieu of foreclosure. That’s when your lender accepts the property title or deed as full satisfaction of the mortgage debt instead of going through a long foreclosure process to take your house. Like with a short sale, verify that your state permits you to settle your remaining mortgage debt for less than the full balance when using a deed in lieu of foreclosure.

Know the Limitations of Foreclosure Avoidance Strategies

Research the effects of these strategies before you use them. Know that situations like too little income to get a loan modification or having too little or no equity in your home to refinance can disqualify you from these programs. Other solutions, like reduced payments or forbearance, usually are temporary so they won’t prevent foreclosure forever.

An experienced housing counselor can explain available remedies, help you determine which you may qualify for and the pros and cons of each. That includes their impact on your finances, especially your credit. Weigh all your options but remember to understand thoroughly and carefully negotiate the terms of any agreements you’ll be required to sign before committing.

Legal Aspects to Consider in Foreclosure Prevention

Foreclosure laws vary by state, so it’s essential to understand the laws in yours. For example, some states require judges to order foreclosure on your house, but other states do not. That means a lender can pursue foreclosure without a court order. Most states can't start foreclosure proceedings until 120 days after your first missed payment. But, how quickly your home gets sold after the legal process starts varies by state.

Every state requires you to get a notice before any foreclosure proceeding begins against you. There also may be federal foreclosure laws lenders must follow depending on the mortgage type you have. A real estate or debtors attorney can help you understand this complex process and protect your rights in your state.

Seeking professional legal assistance prevents you from making potentially costly mistakes, especially if you try to navigate the complex legal system while under financial stress. If you can’t afford to pay for a lawyer, check with your state’s bar association for free or reduced cost programs. But don’t let lack of knowledge or preparation put your home further at risk.

Maintain a Buffer Against Financial Hardship

Emergency savings are a vital safeguard against facing distress for homeowners. Experts recommend having 3-6 months of living expenses set aside.

If you've exhausted your savings to weather a financial crisis, or if you didn't have an emergency fund when financial distress hit, you're not alone. Here are some strategies to build or rebuild your financial safety net.

  • Automate deposits from each paycheck, even small amounts, to build consistency.
  • Use windfalls like tax refunds to make lump sum contributions to your savings.
  • Cut back on leisure spending to free up savings contributions.
  • Explore high-yield savings accounts to make your money work harder.
  • Consider certificates of deposit for longer term savings goals.
  • Split savings across accounts to separate shorter- and longer-term needs.

Maintaining adequate emergency funds is key to surviving future financial shocks.

Don’t Try Navigating Foreclosure Prevention Alone

In difficult financial times, organizations like BlueHub SUN provide critical guidance on foreclosure avoidance. Operating in 11 states, we have been a last resort mortgage lender since the 2009, the height of the housing crisis. Our nonprofit has helped nearly 1,100 clients stay in their homes.

Complete this inquiry form to learn more about how BlueHub SUN can help you. If you are a housing professional and would like to learn more about how BlueHub SUN can support your work,please fill out our inquiry form here.

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