Avoid Foreclosure

While foreclosure is a frustrating and stressful process, it’s important to know all your options when you start falling behind on your loan payments. Here at Chicago Real Estate Source, we’ve compiled an overview of options to avoid the damages foreclosure brings to your credit score and future real estate opportunities.

What is foreclosure, and when does it happen?

Foreclosure happens when a property owner can no longer make the monthly payments toward their mortgage or property taxes. Because mortgage loans are secured with the property as collateral, the lender seizes the property and sells it to reduce the financial loss from the defaulted loan. 

In most cases, a lender will wait 120 days without receiving payment before filing a Notice of Default, which cancels your mortgage and entitles the lender to sell the property. If you can avoid foreclosure, it’s essential to take the first steps before the Notice of Default is filed.

Why foreclosure should be your last choice

Defaulting on a mortgage loan (which simply means that you are unable to make your monthly payments) can put anyone in a stressful situation and is often caused by circumstances beyond your control. It’s important to understand your options when you face possible foreclosure and to see the implications that foreclosing can have beyond the loss of your home.

Damage to your financial history

According to FICO, foreclosure affects your credit score negatively by a loss of 100 points or more. The better your credit score, the more points you will lose from foreclosure.

After a loss this big, it can take up to three years of on-time payments to restore your credit score to a good level. Furthermore, a foreclosure will remain on your credit score for seven years, affecting your chance of qualifying for a future mortgage or personal loan.

Effects of foreclosure on taxes

In addition to affecting your credit score, foreclosure comes with tax penalties as well. When a lender seizes and sells a property and forgives the loan to the borrower, that debt is canceled, which must be reported and taxed as income by the borrower.

Foreclosure reduces market values

Foreclosure doesn’t just hurt the borrower who loses their home; it hurts the housing market as well. Foreclosed homes are sold below market price so that lenders can recoup their losses quickly, and studies show that the drop in the value negatively impacts the value of nearby houses as well by nearly 1%. That doesn’t seem like a significant number, but add up several foreclosed properties in any given neighborhood, and that loss in value increases.

How to Avoid foreclosure

Fortunately, there are several options before foreclosure to preserve your credit score and lessen the damage to your finances. If you are having trouble making payments on your home, consider forbearance loan options with your lender or selling your home at a strategic price.

Forbearance and other loan options

It’s helpful to know that foreclosure negatively impacts the lender and that sometimes they will renegotiate loan terms to avoid ending the mortgage. If you reach out to your lender as soon as possible within the 120 day period before foreclosure, you may be able to refinance, delay your payments, or add back payments to your existing loan.

Short sales

If alternative loan agreements aren’t an option for you, you may be considering a short sale of your home. A short sale sells your property at a price that is less than what you owe to the mortgage company, and the lender has to agree to the terms before you can proceed with the process.

Short sales allow you to alleviate your debt to the lender without damaging your credit score as severely as foreclosure, but they still damage your score and your chance of getting a second mortgage on your next home. Short sales also limit any benefits you as a buyer will get from the sale: since you’re selling at less than what the home is worth, all profit goes back to the lender.

Do you have equity in your property? Consider selling your home!

Selling your home is actually one of the most effective ways of avoiding foreclosure. If you have equity in your home from past mortgage payments, selling gives you a chance to prevent damage to your finances. There are two ways to improve your chances of selling to avoid foreclosure: acting quickly and finding the correct price for your home.

• Pricing it right: The key to selling a home to avoid foreclosure is to price it in a way that encourages interest from buyers. While many sellers want to price their home above market in case someone wants to argue for a lower price, this risks turning away potential buyers. If you’re going to try and sell your home before foreclosure, pricing it at its value will bring in more interest and might even attract competitive offers.
• Acting fast: The more time you have, the better. Negotiating offers and closing on a sale often takes longer than anticipated. If selling your home is a viable option, reach out to a realtor to get your home on the market early on.

Selling your home can be an intimidating process and has a reputation for taking up time and energy. However, when faced with foreclosure, it gives you a chance to reclaim some value and steer clear of damage to your credit and tax penalties.

How to Avoid Foreclosure

If you are behind on your mortgage payments and fear foreclosure, there are some options to consider that can help you get back on your feet. The most crucial step to avoiding foreclosure is to act as quickly as possible. Don’t avoid communication out of embarrassment or hope that your situation will improve. Your lender will be able to give you more flexible repayment options the sooner you reach out to them.

Selling your home

If you can’t make your monthly loan payments, consider selling your home. You can avoid the financial drawbacks of foreclosure and use any profit from equity to downsize or buy in a more affordable market. Even if you don’t make much from the sale, avoiding foreclosure is more beneficial to future tax payments and bad credit.

If you’re looking to sell your home, our real estate agents are experts in the Chicago neighborhoods and are just a phone call away 312-788-7079. Contact us to answer any questions or concerns you might have about selling your property in Chicago, or check out our Sold Search feature to see what homes are selling for in your area.