Foreclosure Spiral

Life events can be unpredictable. Major illness, loss of income and declining property values are a few events that can contribute to a homeowner’s inability to make payments on a mortgage. Events like these can lead a homeowner down the quickly spiraling path of foreclosure. Being aware of the foreclosure spiral may help with deciding the best course of action to take to avoid it. Mortgage refinancing, even to a bad credit mortgage, may provide assistance and keep you in your home. 

The foreclosure spiral begins the day you realize you might be late on your mortgage payment.  Hopefully this realization comes well before the day the payment is due so you can take action to prevent it. If you are unable to make your payment by the end of the grace period, the servicer of your loan will contact the lender. 

Once the lender is notified of default, the foreclosure process can be initiated by a trustee, if you live in a non-judiciary state.  If you live in a judiciary state, you may have a little more time before a lawyer representing the lender can file paperwork to begin the foreclosure.   

Even if a lender has initiated foreclosure, you may still be able to come current on your mortgage payments. You may be able to pay off your existing mortgage by refinancing.  If refinancing is not an option, call your lender to discuss restructuring your mortgage or doing a loan re-modification.  Foreclosure is an expensive process for the lender.  They would rather work with you on a payment arrangement than to take your house. 

If you are unable to come current on your mortgage, either through restructuring or refinancing, you may have no choice but to sell your house.  If you’re in foreclosure, the term is called a “short-sale.”  Your current lender will ultimately decide on the final sales price.  They want to make sure that they recover legal fees and other losses, or they may decide to retain your house or sell it at public auction, and not let you sell it to avoid foreclosure.  

The foreclosure spiral doesn’t end when you come current on your payment or sell the house.  Bringing your house payment current only postpones the process.  If you miss another payment, or don’t keep up with the arrangements made, the foreclosure process continues.  

Whether you sell your house through a short-sale or the bank forecloses, expect to see an IRS Form 1099 from the lender.  If there are any losses, the lender passed the loss for you to pay taxes on them.  The best course of action is to avoid the damaging spiral of foreclosure.  Take steps to stay current on your mortgage, or get a mortgage refinance if it will better your overall financial situation.