4 Last-Minute Ways to Stop Foreclosure Auction Before It Starts

First, let’s start by gaining a true understanding of what a Foreclosure is.

A foreclosure occurs when the mortgagee (i.e., your lender) takes possession of a mortgaged property (i.e., your home) when the homeowner fails to keep up with the mortgage debt payments.

Let’s take a look at this example:

In 2017, James and his wife Marie purchased their dream home. They remained current with their mortgage payments through April 2019. In May 2019, James got laid off from work.

Due to this unforeseen financial hardship, the couple had a record of missed payments. After several months passed, their mortgage lender filed a foreclosure action.

An important component of the foreclosure process is the foreclosure auction.

A foreclosure auction occurs at the end of the foreclosure process, when the lender officially takes possession of the home. During this sale, the lender markets the home to prospective buyers and accepts the highest bid for the property.

Here is a quick, simplified briefing of how a typical foreclosure auction works:

1. The mortgage company will schedule an auction date and time. The auction will either take place online or in person.
2. The lender sets an asking price for the property.
3. Buyers bid online or in person on the home.
4. The lender accepts the highest bidder, then closing is scheduled.

It is important to note that the closer the home gets to the foreclosure auction date, the more difficult it is for you to take the necessary action to prevent the sale!

Now that we have a better understanding of how foreclosures work, let’s take a deeper dive and explore some ways you can prevent them from happening!

#1 Loan Modification

A loan modification is a change made by the lender to your existing loan terms, as a result of non-payment.

To apply for a loan modification, the lender will require you to complete and submit a financial package, which they will evaluate.

After all of your documents have been received and evaluation is completed, two major things happen:

1. The lender will make a decision as to whether or not they will grant you a modification.
2. If they do offer you a modification, the lender will provide you with their proposed “changed” loan terms.

Food for thought: Oftentimes loan modifications actually result in higher monthly payments for the borrower… I know, right?!?

For a clearer picture of what a loan modification looks like, consider this example:

After suffering from unforeseen health issues, Jose’s income takes a hit. Before he knows it, Jose is 3 months behind on his mortgage payments. Confident that he will eventually turn things around, Jose decides to try and keep his property.

After a long and thorough review of his hardship and financial documents, the lender offers Jose a loan modification, or change in his current mortgage terms.

It’s important to note that your lender is not obligated to halt the foreclosure proceedings during the loan modification review process.

However, it’s worth noting certain foreclosure laws protecting homeowners while a complete loan modification or filing application is under review. Federal rules restrict dual tracking during the foreclosure process.

Dual tracking means lenders can’t conduct a foreclosure sale and loan modification at the same time. Several state laws prohibit dual tracking, too.

These laws provide homeowners facing foreclosure with additional time to apply and potentially stop the foreclosure entirely, by keeping their loan current.

Still, it is also crucial to understand that your lender reserves the right to deny your request for mortgage modification, if they feel you are still not financially capable of making the new payments.

So, is a loan modification right for you?

If you want to save your home and believe you can make the payments on the changed loan terms (even if the monthly payments increase), then applying for a loan modification may be the right choice for you.

If you are a homeowner who cannot physically and/or financially keep up with the property and its mortgage payments, then a loan modification may not be the best choice for your needs.

#2 Filing for Bankruptcy

The term bankruptcy refers to the courts offering someone the chance to start fresh by forgiving debts that are unable to be paid. The automatic stay will stop foreclosure proceedings as long as bankruptcy remains in effect.

At the same time, it offers creditors (in this case, your lender) the opportunity to obtain some level of repayment (the repayment is usually based on your assets available for liquidation).

For example, filing for a Chapter 13 bankruptcy lets you settle missed payments over time as part of a repayment plan.

Upon filing for bankruptcy, the court will issue an automatic stay that will stop the foreclosure proceedings, as long as you comply with rulings and the bankruptcy isn’t converted or dismissed.

As there are different types of filings, consult with a bankruptcy attorney to decide which last-minute strategies to stop foreclosure may be the right fit for you.

For example, Chapter 7 bankruptcy and Chapter 13 bankruptcy have different implications for stopping foreclosure.

In reality, the benefits of a Chapter 13 bankruptcy vs Chapter 7 bankruptcy may just buy you some more time, rather than completely let you off the hook for your debts. The bankruptcy process can be very long, complicated, and expensive.

#3 Deed in Lieu

A deed in lieu is when your lender gives you the option to voluntarily transfer the deed back to them.

Important to note: The lender is often hesitant to offer a deed in lieu, because of the potential liability risks, as well as having to satisfy the secondary mortgages or lines of credit against the property.

Also important to note: There is a chance that a deed in lieu will have the same impact on your credit as a foreclosure. Consult with a credit expert before proceeding.

Here is an example of a deed in lieu:

Renee is facing foreclosure and decides to put her home on the market for sale. Unfortunately, she is unable to find a buyer, so the property sits for an extended period. Although it is not common, Renee’s lender ensures title is clear, then offers her a deed in lieu option.

Is a deed in lieu the right move for you?

If you’re a homeowner who values your credit score or plans to purchase another house within the next 4-6 years, then a deed in lieu may not be the best option.

For more details, read my article, Short Sale vs. Foreclosure vs. Deed in Lieu [Difference, Pros & Cons], where I described and compared both of these outcomes.

On the contrary, if you’re a homeowner who is not concerned over your credit score and/or waiting an extended period of time to buy a home, then a deed in lieu may be the right choice for you.

Again, keep in mind this option will only be available to the defaulting homeowner on a case-by-case basis.

#4 Short Sale or Normal Sale

Even if you are in pre-foreclosure, you can sell your home.

Normally, homes in pre-foreclosure are sold to cash house buying companies or private real estate investors, because normal buyers aren’t willing or don’t know how to deal with a real estate transaction that involves foreclosure difficulties.

Investors handle the whole complicated process and relieve homeowners from the stress and debt.

They buy homes in any condition AS IS, but at a discount, so they can then resell the property for a profit. Read this detailed and comprehensive guide on how to find the right investor to buy your home.

You can also learn more in detail about selling your house in pre-foreclosure from our separate article on this topic: Can I Sell My House Even if It’s in Foreclosure?

In some cases, a home in pre-foreclosure is worth less than the owner owes their lender on the mortgage. This can happen after a real estate market crash, if a property loses its value as a result of a disaster, or for other reasons.

It’s also called “being upside down on a mortgage” or “the house is underwater”. Even in this case, the property can be sold, though this situation is more complex and requires a special type of sale—a short sale.

In simple terms, a short sale is when your lender agrees to let you sell your home for less than what is owed on the mortgage balance, and in many cases, to release you from the rest of the debt.

If you want to learn more about short sales, I wrote a few detailed guides on short sales for homeowners:

• A-to-Z Short Sale Guide for Homeowners
• Step-by-Step Short Sale Process for Home Sellers
• What Does a Short Sale Negotiator Do for the Seller?

But here I will tell you briefly how it works.

For the bank to consider a short sale, you must be at least 30-60 days delinquent on your payments and the value of your home must be less than your mortgage balance.

Consider this example:

Phil and Nancy are behind on their mortgage payments. Their current mortgage balance is $100,000. However, the value of their home is only $70,000. Phil and Nancy’s lender approves a short sale on the home, allowing them to sell for the $70,000 that the property is worth.

As a result, the bank takes a loss on the remaining $30,000 balance. Most importantly, the transaction does not get recorded as a foreclosure.

Is short selling your home the way to go?

If you’re a homeowner who wants to keep your property, then a short sale is likely not the right move for you.

On the other hand, if you’re a homeowner who wants to get rid of the property, get out of foreclosure, or have your loan modification denied, then a short sale may be the correct path for you to travel.

When dealing with a short sale, it is important to work with an experienced processing company, who can navigate the entire short sale facilitation process from start to finish. It is also helpful to know that such service is completely free to the homeowner.

There are many reasons people in default on their mortgage payments wait too long before taking action.

Whether your rationale is trying to modify the loan, speaking with bankruptcy or foreclosure attorneys on options, miscommunication with the lender, or just sheer procrastination, you are now left with one question: When is it too late to stop a foreclosure?

Initially, you must be aware of whether your property is located in a judicial vs. a non-judicial state.

A judicial state forces lenders to go through the court process to foreclose on a home. As a result, the foreclosure timeline is usually long and drawn out. This gives the defaulted borrower more time to come up with work-out options. An example of a judicial state is Pennsylvania.

Foreclosures in a non-judicial state take place outside of the court system. As a consequence, the foreclosure process zips along much quicker than a judicial proceeding.

So, a defaulting borrower has significantly less time to take the necessary action steps to avoid foreclosure. An example of a non-judicial state is Texas.

When considering a mortgage modification, as long as you send in the documentation to the lender in a timely fashion and are financially qualified, the lender will typically grant you a 3-month modification trial period.

However, if the foreclosure sale date is within a couple of weeks, it becomes increasingly more difficult to obtain approval. This is truly a case-by-case basis.

If selling the home as-is is your goal, and you owe on the home more than it’s currently worth, then a short sale may be a good fit for you.

But when the foreclosure sale date is less than 37 days out, it becomes progressively more difficult to obtain short sale approval.

At this point in the timeline, the lender does not have to review the offer and can simply reject it upon receipt. This is at the discretion of the lender who owns the loan.

My short sale processing company has seen this situation go both ways. There have been instances when the lender has declined to review the offer package within 37 days of the foreclosure sale date.

On the contrary, we have seen the lender elect to review offers less than 37 days before the auction. In these circumstances, the foreclosure sale date will be postponed during the review process.

In any case, the best thing you can do is to choose one of the courses of action described in this article, make the first step, and inform your lender about it as soon as possible.

If you consider selling your house, no matter how late it seems to be, request a free assessment of your situation. If you let your home go into foreclosure, you will never know if now is really too late or if you still have a chance to avoid it.