THE CHALLENGE: You're facing foreclosure
If you're two or more payments behind, your lender will likely send you a foreclosure notice. The lender will also notify you of the steps it must take before it can put your home up for auction. The rules vary by state.
A foreclosure notice can be scary, but you still have options, including:
- Selling your home on the open market. (Be forewarned: You'll have to pay off the loan and any penalties that may have accumulated.)
- Selling your home as a short sale — which means the bank agrees to accept less than the outstanding loan balance. The same government-approved housing counselors can guide you through this process.
- Working with your bank on a deed in lieu of foreclosure, where you hand back the deed without going through the foreclosure process.
If you've received a foreclosure notice, your main goal is to get out of the home without owing the bank additional money. In some states the bank can go after you for the balance of the loan; in others it cannot. Find out your state's rules at Nolo, a legal-information website.
Feeling overwhelmed? Consider hiring a lawyer to walk you through the process. If you don't have the money, check with the pro bono panel of your local bar association.
Golant occasionally advocates something lenders hate: strategic default, otherwise known as walking away from a loan that's underwater. "The mortgage industry tries to tell people they have a moral duty to pay," she says. But she sees no obligation beyond what the law and contract require. (Again, the law differs in each state, so check.)
She recalls a couple whose home was hundreds of thousands of dollars underwater — not uncommon in Florida — while a nearby house was on sale for half what they owed. The couple's house was in the husband's name only, and the wife's income was protected from his creditors. "I told them, in all seriousness, that if it were me, I'd buy the house up the street," Golant says.
The Florida couple's circumstances notwithstanding, most advisers do not advocate strategic default, since it will sink your credit rating. Homeowners who go through foreclosure or who walk away from their homes may not qualify for another loan of any kind for five to seven years.