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Your options to prevent foreclosure depend on how far along
you are into the foreclosure process. Remember, the earlier you are in foreclosure
proceedings, the easier it is prevent them.
If you are not facing foreclosure, but have fallen far enough behind on whatever
loan is secured by your home to be worried about the prospect of foreclosure,
contact the lender and explain the situation. People are surprised
to learn how flexible lenders can be in this area, but they have just as much
incentive to keep you in your home as you do. Lenders make money by collecting
interest payments from you, and the more stable that stream of payments, the
better. Besides, homes sold out of foreclosure proceedings expose the lender
to all sorts of risks, mostly that the proceeds from the foreclosure sale won't
cover the loan and that other lenders senior to them may get all the proceeds
before they do and their loans won't be covered at all.
This latter reason is why you will probably have much greater success negotiating
with a junior lender than the senior lender. The senior lender is generally
your purchase money lender - the bank or mortgage company from which you
borrowed the money to purchase the home - but federal and then state tax
agencies are always senior to purchase money lenders. Junior lenders are those
who hold second and third mortgages. If there are several lenders with security
(collateral) interests in your home, senior lenders get paid first.
Contact the senior lender first because it probably is willing to work with
you, but if not, contact a junior lender (ideally, one with whom you are in
good standing) and ask it to pay off the loan. Why would someone do this? First,
it means you'll owe more principal and therefore pay more interest. Second,
it moves that lender up to the position of the loan it paid off for you, so
that junior lender may now become the senior lender. Its loan is now more secure,
so that should you be unable to make payments to that lender, it has a better
chance to recoup its money.
Take the following example. You are facing foreclosure on
your home which is worth $250,000. You owe the I.R.S. $30,000; your purchase
money mortgage company $190,000; and another company with which you took out
a second mortgage to pay some medical bills $80,000. Your home will be sold
and the I.R.S. will get paid $30,000; the mortgage company will be paid $190,000;
and the second mortgage company will get paid $30,000. (Actually, the second
lender will probably get paid even less because you are entitled to keep a certain
amount of cash from the sale of your home by the protection of exemption laws.)
The second lender can seek a deficiency judgment against you,
but it's basically worthless because there are no assets from which to collect
the judgment. Because of this, that lender has a lot of incentive to keep your
home from being foreclosed. You may be able to talk the lender into paying off
both debts, using your home as collateral, and moving its new loan into the
most senior position.
If the foreclosure is already in process, things become a little, more tricky,
but there is still a way to turn things around. Most states have what are called
redemption laws. Generally, redemption allows you to stop
foreclosure proceedings and retain title to your home if you are able to
come up with the money owed before a certain deadline. Usually you need not
come up with the entire amount owed, especially if the foreclosing party is
a mortgage holder, just the amount that is past due.
If you think redemption
might be a possibility for you, contact a real estate, bankruptcy
attorney or tax attorney. Redemption laws are often very technical and can have
many specific, time-sensitive requirements for them to be effective. Some states
limit the circumstances under which you can redeem your home, and if the I.R.S.
is foreclosing on your home, there are separate, federal redemption laws.
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