Finding out your home is in pre-foreclosure may send you scrambling for mortgage debt solutions. In some situations, you may be able to catch up on payments. In other cases, you may have to decide if you want to beat the bank to the punch and sell your home yourself.
Can I Sell My House if It’s in Foreclosure?
Yes, you can sell your home in foreclosure. The foreclosure process takes several months and it leaves you with some time to make a sale and pay off your mortgage. However, you don’t have forever and you must put up that “For Sale” sign as soon as possible.
If a home sale isn’t going to work, you do have other options. Declaring Chapter 13 Bankruptcy might allow you to sleep under your own roof and settle all of your outstanding debt.
How Does Foreclosure Work in California?
Foreclosure is the mortgage lender’s method for reclaiming a home after a debtor stops making house payments. Homeowners are considered “in default” on their loan after they’ve missed payments for 90 days. The period that follows is known as pre-foreclosure. It’s a time when your bank hasn’t taken major legal action towards foreclosing on your home yet.
The foreclosure timeline includes many notable points. After contacting you and working towards a solution to avoid foreclosure, your bank would wait one month and file a “Notice of Default” in court. Once you are notified, the formal foreclosure process is underway.
Three months later the bank is permitted to file a “notice of sale.” At this point, you have three weeks before your home can be auctioned off.
Under normal circumstances, foreclosure may take anywhere from four to seven months to complete. However, recent court backlogs in California over 2021 and into 2022 have left cases backed up. A foreclosure may easily take over a year under certain circumstances. These delays won’t apply to most cases though, because banks generally opt for non-judicial foreclosures that don’t require the involvement of the court system.
Benefits of Selling a Home in Foreclosure
Waiting on a “notice of sale” to put your house on the market leaves you only a few weeks to complete a home sale. In that short span, it’s almost impossible for even the best realtor to facilitate a home purchase. However, banks will sometimes delay foreclosure if they are aware you are trying to sell your house. It’s a good idea to inform them of your efforts.
If you sell your home, you’ll avoid many of the harsh penalties that come along with foreclosure.
- A foreclosure won’t appear on your credit report. You may already have late payments affecting your credit score, but the damage a foreclosure causes would be much worse.
- You could secure more of your home equity. Your equity is the value of your home above what you owe on it. Getting a good price on your home could leave you with a profit. It’s important to remember that the penalties and back payments you owe will eat into these profits.
- You can buy another home. Foreclosures on your credit history will make it much harder to secure another mortgage to buy a house. Avoiding foreclosure steers clear of this challenge altogether.
- You have a better chance to pay off the mortgage in full when you control the sale of your home. You can hold out for the best offer and hopefully pay back the bank completely. If your home sells for less than what you owe at auction you could end up with a “deficiency.” Most homeowners aren’t forced to pay the bank for this loss unless the bank decides to file a case in court.
Selling Your California Home Before Foreclosure
Time is of the essence when you want to keep your home off the auction block. You’ll need to sell your home yourself or list your home with a realtor.
Realtors may be better able to get the word out about your home being on the market. Their commission will cut into any profits you make on the house, but a realtor can likely navigate a complex transaction much quicker than you could on your own.
Avoiding Foreclosure With a California Short-Sale
Another option is a “short sale.” This is the term for when your home has lost value and it’s going to sell for less than the debt left on your mortgage. Your home is considered “underwater” on the loan when it is worth less than what’s owed.
The home is allowed to sell quickly at a very low price. The bank must approve a short sale because they would be forced to accept a loss. California is a non-recourse state. This means that any deficiency in the sale price, when compared to what’s owed, would be lost. The bank could not ask the debtor to repay the difference in most non-judicial foreclosures.
Lenders may still agree to these terms, reasoning that it saves them the cost and hassle of having to sell the home themselves. Borrowers don’t make any money on the home, but they’ll be free and clear of the mortgage and will have avoided foreclosure.
Other Options for Avoiding Foreclosure
There are other options that are definitely worth a try, even as you look into the value of your home for a possible sale.
During pre-foreclosure, you’ll be contacted by your bank to determine why you are behind on mortgage payments and find out if there may be a way to steer clear of foreclosure. Your bank may not tell you about every option available, but they will be open to some alternatives to foreclosure.
Reinstate Your Loan
It’s not an option for everyone, but you can pay your missed payments and fees and “reinstate” your mortgage right up until that last week before foreclosure.
You may miss a few mortgage payments during a brief financial hardship, but then find you have the money to pay off what you owe and then resume your normal mortgage payments.
It’s also possible that you could sell off some personal property and get caught up on payments.
Your bank may even work with you on your repayment. They might permit you to pay back the money you owe and the late fees over the course of a few months under a repayment plan. You’d still need to stay current on your ongoing mortgage payment each month.
One potential mortgage lifeline may come in the form of a home refinance. You would seek a whole new mortgage, preferably with lower interest rates and lower payments, from your current bank or another lender. Upon approval, you could pay off your current mortgage.
Your bank may offer you a longer loan term, which would decrease your monthly payments, although you would likely pay more in interest over the life of the loan. Securing a refinancing could also allow you to cash in some of your home equity.
Finding a fair and favorable loan may prove a challenge if your late payments have already shown up on your credit report. A skipped payment can show up on a credit report just 30 days after a payment is missed if it remains unpaid. Already having a second mortgage is another hindrance to securing a new loan.
Your lender could agree to modify your current loan. Much like refinancing, the terms could be changed on a mortgage to allow for lower payments. A loan could be redrawn for a longer term at a lower interest rate.
Banks might consider a modification if you can prove you’ve experienced a major financial crisis. This may include a job loss or a divorce. If you still have a steady income, the bank will have a more favorable view of your chances of keeping up with a modified loan.
In some cases, you wouldn’t have to make up your back payments and pay penalties immediately. These arrears could be added into the principle of the modified mortgage so you could pay them back over time.
Enter Into a Forbearance Agreement
During an extreme financial downturn, mortgage holders can seek forbearance from their lenders. Forbearance allows homeowners to take a brief break from mortgage payments without severe penalty.
Forbearance is usually something banks only agree to under extreme circumstances or if compelled to by the federal government or the State of California. When something like a pandemic affects a large percentage of the population, lenders may be obligated to grant forbearance.
Forbearance usually grants homeowners a break from payments, without penalty, from between three to six months. The mortgage payments resume at this point. There is no reduction in the mortgage’s balance during forbearance.
California instituted forbearance measures during the COVID-19 outbreak to keep people from losing their homes while out of work. Federally backed mortgages were also eligible for forbearance. Some of these temporary measures might remain in place and it’s an option worth investigating.
Declaring Chapter 13 Bankruptcy to Halt Foreclosure
People experiencing a debt crisis may not realize that filing for bankruptcy could be their ticket to keeping their homes and financial freedom. Borrowers who fall behind on mortgage payments may be struggling with other debt as well. Chapter 13 Bankruptcy may delay foreclosure for years while also providing help in dealing with other outstanding debt.
Chapter 13 Bankruptcy allows filers to create a three to five-year plan to pay off their debts. Some debt is reduced as long as the borrower makes every payment. Some debt is forgiven in Chapter 13 discharge upon completion of your payment plan.
Your mortgage isn’t erased, but you’d have a better chance to stay current on payments and you’d stay in your house. The biggest benefit is that your missed payments and penalties could get folded into your payment plan with all of your other debt. Second mortgages often get erased in full.
Bankruptcy won’t be a viable option for everyone, but it’s more than worth it to discuss the benefits of Chapter 13 Bankruptcy with a skilled Southern California Bankruptcy Attorney. Your consultation is free and it’s a good way to stay informed of all of the choices before you.
If you do find you need legal representation, you can learn more about the cost of a bankruptcy attorney. You may feel you can’t spend any money on a bankruptcy professional, but the cost of not having one could be much greater.
Contact a Los Angeles Chapter 13 Bankruptcy Lawyer Before a Foreclosure
Having an auction date looming over your house can make it seem like your foreclosure is inevitable. You shouldn’t give up just yet. There are ways to avoid the punishing effects of foreclosure, even if you can’t stay in your home. Selling your house may be a great solution, but if you don’t want to live anywhere else, a Los Angeles Bankruptcy Attorney could offer another solution.
When you are looking for an option that lets you keep your family home, contact the Law Offices of Steers & Associates for a free bankruptcy consultation on your case. If filing for bankruptcy is your best path to financial freedom, we can help you take the first step. We have helped clients from all walks of life get out from under foreclosure and debt to earn financial freedom.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.