Poor credit can make it harder for you to get a mortgage, an apartment, or a credit card. It can also put you on the hook for higher interest rates, which can make the loans and credit lines that you do obtain more expensive to repay.1
If you have fair or bad credit, defined as a FICO score of 669 or below, you may be wondering how to increase your credit score. As hopeless as the situation might seem now, poor credit doesn’t have to last forever. There are steps you can take right now to begin raising your credit score.
Get a Copy of Your Credit Reports
Before you can figure out how to increase your credit score, you have to know what score you’re starting from. Since your credit score is based on the information in your credit report, the first place you should go to improve your credit score is your credit report.2
A credit report is a record of your repayment history, debt, and credit management. It may also contain information about your accounts that have gone to collections and any repossessions or bankruptcies.3
Order copies of your credit reports from each of the three major credit bureaus to identify the accounts that need work. You can get free copies of your credit reports every 12 months from each of the major bureaus through AnnualCreditReport.com.
Dispute Credit Report Errors
Under the Fair Credit Reporting Act, you have the right to an accurate credit report.4 This right allows you to dispute credit report errors by writing to the relevant credit bureau, which must investigate the dispute within 30 days.5
Errors, which can stem from data entry snafus by creditors, easily interchangeable Social Security numbers, birthdays, or addresses, or identity theft, can all hurt your credit score.6
For example, if you already have a history of late payments, an inaccurately reported late payment on the report of someone could have a dramatic and fairly immediate negative impact on your score because late payments represent 35% of your credit score. The sooner you dispute and get errors resolved, the sooner you can start to increase your credit score.7
Avoid New Credit Card Purchases
New credit card purchases will raise your credit utilization rate—a ratio of your credit card balances to their respective credit limits that makes up 30% of your credit score.8 You can calculate it by dividing what you owe by your credit limit. The higher your balances are, the higher your credit utilization is, and the more your credit score may be negatively affected.
Under the FICO score model, it’s best to keep your credit utilization rate below 30%. That is, you should maintain a balance of no more than $3,000 on a credit card with a limit of $10,000.9 To meet that 30% target, pay cash for purchases instead of putting them on your credit card to minimize the impact on your credit utilization rate. Even better, avoid the purchase completely.
Pay off Past-Due Balances
Your payment history makes up 35% of your credit score, which makes it the most important determinant of your credit.8 The further behind you are on your payments, the more it hurts your credit score.
Once you’ve curbed new credit card spending, use the savings to get caught up on your credit card payments before they are charged off (the grantor closed off the account to future use) or sent to a collections agency.10
Do your best to pay outstanding balances in full; the lender will then update the account status to “paid in full,” which will reflect more favorably on your credit than an unpaid account.11 In addition, continuing to carry a balance as you slowly pay off an account over time will subject you to continued finance charges.12
Avoid New Credit Card Applications
As long as you’re in credit repair mode, avoid making any new applications for credit. When do apply for new credit, the lender will often perform a “hard inquiry,” which is a review of your credit that shows up on your credit report and impacts your credit score.13
How many credit accounts you recently opened and the number of hard inquiries you incurred both reflect your level of risk as a borrower, so they make up 10% of your credit score. Opening many accounts over a relatively short period can be a red flag to lenders that a borrower is in dire financial straits, so it can further decrease your score.8 In contrast, having few or no recently opened accounts indicates financial stability, which can boost your credit score.
Leave Accounts Open
It’s rare that closing a credit card will improve your credit score. At the very least, before you close an account, ensure that it won’t negatively affect your credit. You might be tempted to close credit card accounts that have become delinquent (past due), but the outstanding amount due will still up on your credit report until you pay it off. It’s preferable to leave the account open and pay it down every on time each month.14
Even if your card has a zero balance, closing it can still hurt your credit score because credit history length makes up 15% of your credit score. Credit history length factors in the age of your oldest account and most recent account as well as the average age of all accounts. In general, the longer you keep accounts open, the more your credit score will increase.8
Contact Your Creditors
They might be the last people you want to talk to, but you’d be surprised at the help you might receive if you call your credit card issuer. If you’re having trouble, talk to your creditors about your situation.
Many of them have temporary hardship programs that will reduce your monthly payments or interest rate until you can get back on your feet. If you alert them to the possibility that you might miss an upcoming payment, they may even be able to establish a mutually beneficial arrangement.15 These courtesies may allow to make progress in paying down outstanding balances and eventually raising your credit score.
Pay off Debt
Your amount of debt that you’re carrying as a proportion of your overall credit represents 30% of your credit score, so you’ll have to start paying down that debt to raise your credit.82
If you have a positive cash flow, meaning you earn more than you owe, consider two common methods for paying down debt: the debt avalanche method and the debt snowball method. With the avalanche method, you first pay off the credit card with the highest APR with your extra money. Make minimum payments on other cards, and use any leftover funds toward the high-interest card. When you pay off that card, move to the next-highest APR card and repeat.16
The snowball method requires you to make minimum payments on every card, every month. You then use any extra funds to pay down the card with the lowest balance. Once that one is paid off, apply extra money to the card with the next lowest balance, but continue to make minimum payments on the other cards.
If, however, you owe more than you make, you’ll need to get creative about coming up with the extra money you need to pay off your debt. For example, you could drive for a ride-sharing service or sell some things on an online auction website for extra cash. It will take some sacrifice, but the financial freedom and the credit score points you’ll gain will be worth it.
Get Professional Help
If you are overwhelmed by your credit situation or monthly expenses, you live paycheck to paycheck, or are confronting bankruptcy, consumer credit counseling agencies are available to assist you. Certified credit counselors can help you create a budget, put together a debt management plan, and get your finances in order.17
Of course, the key is to find a reputable one. Locate a trustworthy credit counseling agency through the National Foundation for Credit Counseling, the longest-running non-profit organization. Or, locate a credit counselor using the search feature of the U.S. Trustee Program offered through the U.S. Department of Justice. You can always simply refer to your credit card billing statement for a phone number to call if you’re experiencing trouble making your payments.18
Be Patient and Persistent
Patience isn’t a factor that’s used to calculate your credit score, but it’s something you need to have while you’re repairing your credit. Your credit wasn’t damaged overnight, so don’t expect it to improve in that amount of time. Continue monitoring your credit, keeping your spending in check, and paying your debts on time each month, and over time you will see a boost in your credit score.
A short sale is a real estate transaction that occurs when a homeowner sells a property for less than they owe on the mortgage, and the lender approves of the “short” payoff.
Understand what a short sale involves, how it differs from a foreclosure, and its alternatives to decide whether it’s the right approach to get out from under your mortgage.
What Is a Short Sale?
A short sale is any property sale where the proceeds of the sale fall “short” of the original loan amount. It occurs when a seller sells a property for less than the balance of their loan, and the lender agrees to accept less than the amount originally due to them after all costs of the sale.
Short sales are commonly initiated by distressed homeowners who are underwater on their mortgages (the loan balance exceeds the home’s fair market value) and can’t afford or otherwise keep the home but want to avoid foreclosure. But they can also occur if the accepted sale price on a home is higher than the mortgage but not high enough to pay all closing costs and commissions.
In a successful short sale, the lender typically agrees to release the lien on the property in exchange for receiving the loan payoff. It may either forgive the “deficiency” or difference between the original loan balance and payoff or make a plan with the seller to settle the remaining debt.1 In either case, since the lender will be receiving a short payoff in such a transaction, it must agree to grant a short sale, and will generally only do so if it will benefit the lender’s bottom line. If the lender doesn’t view the homeowner or property as a good fit for a short sale, it may disapprove of the sale.
How a Short Sale Works
A legitimate short sale must be an arm’s length transaction involving an unrelated buyer and seller and a bona fide lender.2 The following is an example of how the typical short sale unfolds:
A homeowner has a home that’s worth less than what they owe on the mortgage but must sell it as a result of hardship.
The seller enlists an agent to discuss the short sale proposal (known in short sale terminology as the “short sale package”).
The seller’s agent approaches the lender to assess their willingness to entertain the proposal and identify what the lender requires for a short sale.
The seller works with their agent to price the home and put it up for sale.
A buyer’s agent makes the seller an offer on the property.
The buyer and seller negotiate the offer through their respective agents.
The seller’s agent accepts the offer on the seller’s behalf, and both the buyer and seller sign it, subject to the lender’s approval.
The seller’s agent presents the offer to the lender along with the short sale package including the signed purchase contract, a hardship letter explaining why the seller can’t keep the home, and a narrative about the local market trends that support the short sale.
The lender does a “bottom-line” review of the package and eventually responds with approval, refusal, or, in some cases, no response. If the lender refuses the short sale, they’ll often state the net proceeds that would be acceptable for approval. In the case of approval, the lender sends a short sale approval letter to the seller in order to demand the loan payoff in return for releasing the lien.
Escrow closes, and the proceeds are turned over to the lender, not the seller.3
To ensure that the short sale is an arm’s length transaction, the buyer and seller will generally have to sign affidavits confirming that they aren’t related.
Requirements for a Short Sale
There are four essential ingredients for a short sale, which are generally handled by real estate agents who specialize in short sales:
An underwater home: This means that a home has a fair market value that’s less than the remaining balance on the homeowner’s mortgage.
A seller with a hardship: Most lenders view job losses, surprise medical costs, the homeowner’s death, natural disasters, and military service as acceptable hardships for a short sale, to name a few examples.3 Whatever the hardship, it should serve as a clear impetus for the homeowner to sell “short.”
A willing lender: There’s no point in proceeding if the lender refuses the possibility of a short sale in no uncertain terms, which happens rarely. The lender should at least be willing to entertain a short sale proposal, but the more proactive and committed they are to the seller’s agent’s initial approach, the smoother the transaction is likely to be.
A qualified buyer: Buyers should ideally be prequalified or preapproved, free of excessive contingencies, and flexible with regards to closing.
Lenders generally don’t consider the mere fact that you have an underwater mortgage to be a qualifying hardship for a short sale.
Short Sale vs. Foreclosure
Both short sales and foreclosures provide homeowners with a means to dispose of a property they can’t keep. However, a short sale is a pre-foreclosure transaction that takes place when you sell a home for less than you owe. A foreclosure occurs when a lender repossesses your home after you fail to make the required payments.
A short sale is generally a voluntary, cooperative undertaking with a lender that allows you to settle debts or have them forgiven in order to avoid the more aggressive, and, in some cases, unwanted, act of repossession by the lender in foreclosure. Borrowers prefer them because they may not damage their credit score as much a foreclosure; moreover, they can get back on their feet faster because they can buy a new home in as little as two years after a short sale compared to seven years after a foreclosure.4 Short sales also take less time, up to 10 months compared to the foreclosure timeline of as long as one year.53 Lenders also favor short sales given their lower costs.
Short Sale
Foreclosure
Allows borrowers to settle debts or have them forgiven by lenders
Results in repossession of the borrower’s home
Takes up to 10 months
Takes up to one year
Can have a less negative impact on credit
Can have a more negative impact on credit
Allows you to get a new mortgage within two years
Requires you to wait as long as seven years to get a new mortgage
Alternatives to a Short Sale
If you’re underwater on your mortgage and can’t keep the home, a short sale may seem like the only way to avoid foreclosure. But other foreclosure alternatives may be available to you.
Discuss your situation with your lender to determine whether you’re eligible for a loan modification wherein the lender changes the terms of the existing loan to eliminate the need for a short sale (for example, by reducing the principal), or a mortgage refinancing (replacing it with a new one).
Key Takeaways
A short sale occurs when the proceeds from a real estate transaction fall short of the original loan balance.
It’s often used by homeowners who are underwater on their mortgages and can’t keep the home but want to avoid foreclosure.
The short sale must be an arm’s length transaction between an unrelated buyer and seller, but it’s usually facilitated by real estate agents and must be approved by a lender.
Short sales are preferable to foreclosures because of their less pronounced impact on credit and shorter timeline, but distressed borrowers should also discuss other foreclosure alternatives with lenders.
Find about your loss mitigation rights, what foreclosure notices you’ll receive, your right to challenge the foreclosure, and more.
When you take out a loan from a bank or mortgage company to purchase a home, in exchange you have to promise to comply with a monthly payment schedule and agree that the lender can sell the property at a foreclosure sale if you fall behind.
If you’re facing a foreclosure, no matter if it is judicial or nonjudicial, don’t panic—you have rights. These rights are based on federal law, state law, and the mortgage (or deed of trust) that you signed when you took out the loan. Read on to find out more about your rights during a foreclosure.
Loss Mitigation Rights
Under federal law, the servicer must contact, or attempt to contact, you by phone to discuss loss mitigation options no later than 36 days after you miss a payment, and again within 36 days after each subsequent delinquency. No later than 45 days after missing a payment, the servicer has to inform you in writing about loss mitigation options that might be available, as well as appoint personnel to help you try to work out a way to avoid foreclosure. (There are some exceptions to some of these requirements, like under some circumstances if you’ve filed bankruptcy or asked the servicer not to contact you pursuant to the Fair Debt Collection Practices Act. To get details, talk to a lawyer.)
Also, the servicer generally can’t officially begin a foreclosure until you’re more than 120 days past due on payments. This time period should provide you with ample opportunity to submit a loss mitigation application to the servicer.
Right to a Breach Letter
Mortgages and deeds of trust typically have a provision that requires the lender to send you a notice—commonly called a “breach letter”—informing you that the loan is in default before the lender can accelerate the loan (call the entire balance due). The breach letter gives you a chance to cure the default and avoid foreclosure.
Notice of the Foreclosure
In all states, you’re entitled to notice of a pending foreclosure. Depending on state law and the circumstances, the foreclosure will be either judicial or nonjudicial.
Judicial Foreclosures
If the foreclosure is judicial, you’ll get a complaint and summons telling you that a foreclosure has started.
Nonjudicial Foreclosures
You also get some kind of notice about a pending nonjudicial foreclosure. You might get a notice of default in the mail, which gives you a limited amount of time to get current and stop the foreclosure. You might also get a notice of sale that lets you know when the sale will happen.
Tip: Always Read Your Mail
If you’re behind in mortgage payments, be sure to pick up any certified or registered mail, even if you have to go to the post office. Also, be sure you read any communications you receive from your servicer. These notices will inform you about deadlines and important dates in the foreclosure process.
If the servicer makes an error and neglects to provide proper notice under state law, you likely have a defense to the foreclosure. You probably won’t be able to derail the proceedings permanently, but you might be able to force the servicer to issue a new notice and start the proceedings over again.
In other states, notice of the foreclosure might consist of publishing information about the sale in a newspaper and posting a notice on the property or in a public location.
Right to Reinstate
State law sometimes allows you to stop a foreclosure by getting current on the loan with a lump-sum payment covering overdue payments, fees, and expenses. You then resume making regular payments. Usually, you must reinstate the loan by a specific deadline, like 5:00 p.m. on the last business day before the sale date or some other deadline.
Also, many mortgages and deeds of trust give you the right to reinstate. Usually, the contract says reinstatement is allowed up until five days before the sale in a nonjudicial foreclosure or up until judgment in a judicial foreclosure. And even if you don’t have the legal right to reinstate, the lender might, after considering the situation, let you reinstate. If the lender refuses your request, consider asking a court to allow you to reinstate. A judge generally won’t want to foreclose if you have enough money to get caught up. Sometimes merely offering to reinstate in front of a judge will embarrass the lender into accepting the reinstatement.
Right to Redeem
All states permit borrowers in foreclosure to redeem the property before the sale, and certain states provide a redemption period after the sale. You would redeem the home by paying the full amount owed to the bank, plus fees and expenses, or by reimbursing the person or entity that bought the property at the foreclosure sale, depending on the situation.
Unfortunately, unless you can get a new loan, either kind of redemption might not be practical if you’re already behind in payments.
Right to Foreclosure Mediation
Some states, counties, and cities give homeowners who are in foreclosure the right to participate in mediation. Mediation brings the borrower and foreclosing lender to the table with the goal of working out a loss mitigation option, like a modification or a short sale.
Right to Challenge the Foreclosure
You have the right to challenge the foreclosure in court. If the foreclosure is judicial, you’ll likely find it easier—and generally less expensive—to simply participate in the existing foreclosure lawsuit. But if the foreclosure is nonjudicial, you’ll have to file your own lawsuit to raise defenses to the foreclosure. If the servicer made a mistake, violated the law, or you want to make the lender prove its case, you might want to fight the foreclosure in court.
Right to a Surplus
After a foreclosure sale, you might get a notice telling you who bought the property and the sale price. If the sale brought in enough to repay the loan, including all foreclosure fees and costs, and any other liens on the property, as well as some extra money, you’re entitled to the excess proceeds, called a “surplus.”
On the other hand, if the foreclosure sale doesn’t fully pay off the debt, you might be on the hook for a “deficiency judgment,” which is a personal judgment against you for the difference between the total debt and a lesser sale price.
Talk to a Lawyer
This article covers many of the rights you have in a foreclosure, but—of course—others exist. Your rights in a foreclosure can vary a great deal depending on your jurisdiction and situation. To get detailed information about your rights, consider talking to a local foreclosure lawyer.
Foreclosures affect mortgage holders and their future housing situations because they negatively impact credit scores. In fact, for individuals with high credit scores, a home foreclosure can deduct up to 100 points from their grade. Typically, those foreclosed upon will look for a rental before they apply for another home loan because they are unable to qualify for financing for at least another year. But since foreclosures impact credit scores, finding a good apartment with less than exemplary credit is tricky.
To navigate today’s competitive rental market with a foreclosure on your credit history, use the following tips.
Start your search fast
Foreclosures don’t appear on credit reports right away – the process takes time. If possible, search for an apartment and lock down your lease before the foreclosure is finalized. While your previous missed payments leading up to the actual foreclosure will likely be processed and reported to the credit bureaus, these won’t have as large of an impact as the foreclosure itself, and will only be reported when you have been in default for more than 30 days. Even so, prepare some explanation for when a landlord asks about missed payments upon reviewing your financial history.
Provide a hefty deposit
Your landlord might be willing to overlook your less than satisfactory financial history if he or she is given a heftier deposit. The up-front lump sum proves you have the ability to pay monthly rent and gives them a safety net in case you do fall into financial trouble again in the future. Overall, larger down payments give landlords peace of mind.
Search for a private landlord
Privately-owned apartments and in-law units owned by single-family homeowners sometimes don’t require credit checks. While this is not something you want to ask up front, as it is a red flag to the landlord, searching for these property types maximizes your selection of rental homes and betters your odds of being selected. Try searching for condos for rent, as well. Finding an agent who has access to private listings is typically the easiest way to searching for and scheduling showings with single-family homeowners renting out their spaces.
Minimize your additional debts
Keeping your other finances in check after the foreclosure helps your credit bounce back sooner. Plus, having a balanced and manageable financial portfolio will help you better cope with your recent asset loss and start fresh – totally debt free.
Ask a friend to cosign
If you’re having trouble getting approved, ask a friend or family member to put his or her name alongside yours on rental applications. Cosigners assume responsibility for monthly payments should you fail to pay rent, which helps landlords feel safeguarded when leasing to those with past financial defaults on their reports. If you are enlisting a cosigner, be extra cautious with budgeting for your rental. If you were to ever fall short on rent, your friend or family member would be responsible, and you would end up owing that person money in the end.
Finding an apartment or private rental after foreclosure shouldn’t be a hassle, and likely won’t when the proper due diligence is applied.
Learn what you can do after the foreclosure sale, from staying in the home for a certain period of time to buying the property back.
If your home was recently sold in a foreclosure sale, but you haven’t yet moved out (or if you’re currently going through a foreclosure), you might want to know what happens next. Some homeowners quickly leave the home after the home is sold. However, depending on your circumstances and your state’s laws, you might have other options to either stay in the home for a longer period of time, get money to move out sooner, or even buy back the home.
Redeeming the Home
Some states permit a foreclosed homeowner to buy back the home within a certain period of time after the sale. This is called a redemption period. To redeem the home, you usually have to pay the total purchase price, plus interest, and any allowable costs, to the purchaser who bought it at the foreclosure sale. In some states, though, you’ll have to pay the total amount owed on the mortgage loan, plus interest and expenses.
The deadline and procedures for exercising a right of redemption varies from state to state, and not all states provide a redemption period after the sale.
Getting Help to Buy Back the Home
In order to redeem, the former homeowner has to come up with another source of financing. But getting a bank to lend you money after a foreclosure can be very difficult, even if you have a steady income, because your credit score will have taken a bit hit. (Learn how a foreclosure affects your credit score.)
Some special programs are available to help homeowners in this type of situation. For example, a program called Stabilizing Urban Neighborhoods (SUN) offered by a nonprofit organization helps foreclosed homeowners in Massachusetts, Maryland, Rhode Island, New Jersey, Illinois, Connecticut, and Pennsylvania by purchasing foreclosed properties and then reselling those properties back to the former homeowners, usually at current fair market value, with a new, fixed-rate 30-year mortgage. (Learn more about the SUN Initiative.)
Live in the Home During the Redemption Period for Free
If your state provides a redemption period after the sale, you sometimes have the right to live in the home payment-free during this time. For example, in Michigan, most homeowners get a six-month redemption period (some people get a year) during which time they can live in the home. (Under some circumstances, though, like if the foreclosed homeowner unreasonably refuses to allow the purchaser to inspect the home, the purchaser can begin an eviction sooner. )
By staying in the home during the redemption period, you can save money by living rent-free. This way you can use the money that you otherwise would have spent on housing to pay other bills and start rebuilding your credit. (To learn more about your rights during the redemption period in your state, if there is one, consider talking to a local foreclosure attorney.)
Remaining in the Home as a Tenant
In some cases, you might be able to remain in the home as a tenant after the foreclosure sale. For example, Freddie Mac offers a program that allows recently foreclosed homeowners to rent their home on a month-to-month basis, if Freddie Mac acquires the property as a result of foreclosure. (You can learn more about this program, called the Freddie Mac REO Rental Initiative, at the Freddie Mac website. If you want to find out if Freddie Mac owns your loan, go to www.freddiemac.com/mymortgage or call 800-Freddie.)
Live in the Home Until You’re Evicted
If you don’t move out after the purchaser gets title to the home (typically either after the sale or after the redemption period), the new owner (often the foreclosing party) will start eviction proceedings to remove you from the property. The length and procedures for the eviction process varies from state to state. In some cases, the foreclosing party can include the eviction as part of the foreclosure action—depending on your state’s law and the circumstances of your case—while in other instances, it will have to file a separate eviction action with the court.
You might receive a notice prior to the start of the eviction (called a Notice to Quit), which gives you a certain amount of time—for example, three days—to leave the home before the eviction officially starts. While you can stay in the home until you’re forcibly removed through the eviction process, it is generally best to leave the property before this time period expires.
Getting a Cash for Keys Deal
To avoid having to complete an eviction, the purchaser might offer you a “cash for keys” deal. With this arrangement, you agree to leave the home by a certain date, and in good condition. In exchange, the purchaser gives you a specified amount of cash to help pay for your relocation costs.
You can request a cash-for-keys agreement if the purchaser doesn’t offer you one. You can contact Result Capital for that.
Federal laws protect homeowners when facing foreclosure.
On January 10, 2014, new federal laws that protect homeowners in the foreclosure process went into effect. These laws protect consumers by:
ensuring servicers provide assistance if a borrower is having difficulty making mortgage payments, and
protecting borrowers from wrongful actions by servicers.
Keep reading to learn more about these federal laws and how they might help you if you’re facing a foreclosure.
Why the Need for Laws Protecting Homeowners?
During the foreclosure crisis that began around 2008, the number of homeowners in financial distress increased exponentially and servicers simply couldn’t keep up with the increased demands for information and assistance. As a result, servicing errors were common and egregious.
Servicers Now Must Provide Homeowners With Assistance
Now, under federal law, servicers are supposed to work with borrowers who are having trouble making monthly payments.
Early Intervention Requirements: Servicer Must Contact the Borrower By Phone (or In Person) and In Writing
If a borrower falls behind in payments, a servicer must attempt to contact the borrower to discuss the situation no later than 36 days after the delinquency, and again within 36 days after each subsequent delinquency, even if the servicer previously contacted the borrower. If appropriate, the servicer must tell the borrower about loss mitigation options—like a modification, short sale, or deed in lieu of foreclosure—that might be available to the borrower. But, if you filed for bankruptcy or asked the servicer to stop communicating with you under to the Fair Debt Collection Practices Act (FDCPA), and the servicer is subject to this law, the servicer doesn’t have to try to contact you by phone or in person.
No later than 45 days after missing a payment, the servicer must inform the borrower in writing about loss mitigation options that might be available, and must do so again no later than 45 days after each payment due date so long as the borrower remains delinquent. The servicer does not, however, have to provide the written notice more than once during any 180-day period. If you’ve filed bankruptcy or asked the servicer not to communicate with you, it generally has to send a modified letter, subject to some exceptions.
Continuity of Contact Requirements: Servicer Must Appoint Personnel to Help the Borrower
The servicer must assign personnel to help the borrower by the time the borrower falls 45 days delinquent. The personnel should be accessible to the borrower by phone and able to respond to borrower inquiries.
When applicable, the servicer’s personnel should help the borrower pursue loss mitigation options, like by advising the borrower about:
available loss mitigation programs
how to submit a complete loss mitigation application
the status of a submitted application
how to appeal (if the application is denied), and
the circumstances when the servicer may refer a file to foreclosure.
The servicer may assign a single person or a team to assist a delinquent borrower.
Restrictions on Dual Tracking
Federal law also restricts “dual tracking.” Dual tracking happens when a servicer simultaneously evaluates a borrower for a loan modification (or other loss mitigation option) while at the same time pursuing a foreclosure.
Restrictions on Starting Foreclosure
Servicers generally can’t start a foreclosure until the loan obligation is more than 120 days delinquent, which provides time for the borrower to submit a loss mitigation application. A borrower is considered delinquent starting on the date a periodic payment sufficient to cover principal, interest, and, applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid.
What is the first foreclosure notice or filing? In a judicial foreclosure, this means the foreclosing party can’t file a lawsuit in court to start the foreclosure until you’re more than 120 days behind. If the foreclosure is nonjudicial, the foreclosing party can’t begin the foreclosure by recording or publishing the first notice until you’re more than 120 days late in payments. If your state’s foreclosure laws don’t require a court filing or any document to be recorded or published as part of the foreclosure process, the first notice is the earliest document that establishes, sets, or schedules a date for a foreclosure sale.
Further restrictions on starting a foreclosure. Even if a borrower is than 120 days delinquent, if that borrower submits a complete loss mitigation application before the servicer makes the first notice or filing required to initiate a foreclosure process, the servicer can’t start the foreclosure process unless:
the servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted)
the borrower rejects all loss mitigation offers, or
the borrower fails to comply with the terms of a loss mitigation option such as a trial modification.
To learn more about how foreclosure works in your state, see our Key Aspects of State Foreclosure Law: 50-State Chart.
Restrictions on Continuing Foreclosure After the Borrower Requests Help
If the servicer has already started a foreclosure and receives a borrower’s complete loss mitigation application more than 37 days before a foreclosure sale, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until one of the three conditions mentioned above has been satisfied.
A Motion to Reschedule the Foreclosure Sale Doesn’t Violate Federal Law
While federal law generally prohibits a servicer from moving for a foreclosure judgment or an order of sale after a borrower submits a complete loss mitigation application, the U.S. Court of Appeals for the 11th Circuit held that a motion to reschedule a previously set foreclosure sale doesn’t violate this law. (See Landau v. RoundPoint Mortgage Servicing Corporation, 925 F.3d 1365, 27 Fla. L. Weekly Fed. C 2045, (11th Cir. June 11, 2019)).
The servicer doesn’t have to review multiple applications after you become delinquent on the loan. But if you bring the loan current after submitting an application, you may submit another.
Applicability of the Laws
These laws apply to mortgage loans that are secured by a property that is the borrower’s principal residence. The determination of principal residence status depends on the specific facts and circumstances regarding the property and applicable state law.
For example, a vacant property might still be a borrower’s principal residence under certain circumstances, like when a servicemember relocates due to permanent change of station orders and was living at the property as his or her principal residence immediately prior to displacement, intends to return to the property at some time in the future, and doesn’t own any other residential property.
Getting Help
If you’re having trouble making your mortgage payments, consider submitting a loss mitigation application to your loan servicer. Once submitted, under federal law, the servicer has five days to tell you whether it needs more information—so long as you submit the application 45 days or more before a foreclosure sale—and, if so, what information it needs.
Generally, the servicer is required to evaluate the application for all loss mitigation options within 30 days, as long as you submit the complete application more than 37 days before a foreclosure sale. Also, you may generally appeal a loan modification denial so long as the servicer received the complete loss mitigation application 90 or more days prior to a scheduled foreclosure sale. Remember, the servicer is required to review you for a loss mitigation option only once, unless you bring the loan current after submitting your complete application.
If you have questions about the foreclosure process in your state or about the laws discussed in this article, consider talking to a foreclosure attorney. If you want to learn about different loss mitigation options or you need help with your loss mitigation application, consider contacting a HUD-approved housing counselor.
Learn the basics about judicial and nonjudicial foreclosures.
The foreclosure process in any given state is generally classified as being either judicial or nonjudicial. The key difference between the two procedures is court involvement. (To learn which foreclosure procedure lenders in your state usually use, see Key Aspects of State Foreclosure Law: 50-State Chart.)
Judicial Foreclosures
All states allow a lender to foreclose judicially, but certain states require this process for residential properties.
How the foreclosure process works. In states that have a judicial foreclosure process, the lender must file a lawsuit to foreclose the property. The court will attempt to determine the circumstances surrounding the default through in-court hearings and documents filed by the homeowner and lender. The homeowner will also have the opportunity to try to negotiate a way to avoid foreclosure. If the court determines that the foreclosure is proper, and the homeowner isn’t successful in the negotiations to stop the foreclosure, the court will enter a judgment against the homeowner and a foreclosure sale will follow. (For details about the judicial foreclosure process, see How Judicial Foreclosure Works.)
How long a foreclosure takes. The judicial foreclosure process can be lengthy, frequently lasting several months—or years in some cases. (Learn about states with a long foreclosure timeline.)
Nonjudicial Foreclosures
In states that use a nonjudicial foreclosure process, the court system is minimally involved, if at all. In fact, a nonjudicial foreclosure is typically handled entirely out of court by a trustee, which the lender designates in the deed of trust that the borrower signs when buying the home. Or the lender might substitute a different trustee later on to handle the foreclosure.
In states that allow nonjudicial foreclosures, a lender might choose to foreclose through the courts. For example, if there’s a title problem that a court needs to sort out, the lender might choose to foreclosure judicially—even when state law permits nonjudicial foreclosures.
How the foreclosure process works. Nonjudicial foreclosure procedures differ widely from state to state. In some states, the trustee provides the homeowner with a notice of default that lets the homeowner know that the trustee intends to foreclose on the home. The homeowner is then given a period of time to get current on the loan or negotiate a way to prevent a foreclosure. The trustee might also have to send a notice with details about the sale. Depending on state law, though, the lender might:
send only a notice of sale
send a combined notice of default and sale, or
state law might only require the lender to publish notice in a newspaper and post a notice somewhere on the property or somewhere public.
If the homeowner can’t cure the default or otherwise find a way to avoid foreclosure, the trustee sells the home at a foreclosure sale. (For details about nonjudicial foreclosures, see How Nonjudicial Foreclosures Work.)
How long a foreclosure takes. The nonjudicial foreclosure process is generally quicker and less expensive than the judicial process, often lasting just a few months or less. (To learn more about the timelines for judicial and nonjudicial foreclosures, see our articles Timeline for a Judicial Foreclosure and Timeline for a Nonjudicial Foreclosure.)
Talk to an Attorney
Foreclosure laws and procedures vary from state to state and, again, sometimes depend on the individual circumstances of the case. While the above descriptions provide general information about the two primary foreclosure processes, if you’re facing a foreclosure, you should become familiar with the specific laws and procedures in your state. Consulting with an attorney or a HUD-approved housing counselor is strongly recommended.
Also, be aware that that states sometimes have different laws and procedures if the property being foreclosed is a commercial property, multifamily home, timeshare, or undeveloped land, rather than a single-family residence.
