How to avoid a foreclosure

By Vanessa Roman

Foreclosure is a scary word, and it should be. It signifies a loss of control over your investment property and your financial stability. Additionally, the social, emotional and financial consequences of foreclosure come with long-lasting implications.
 
The foreclosure process is started by a bank or lender after an investor or homeowner has failed to comply with the terms of their mortgage contract. The most common compliance failure is not making the agreed upon mortgage payments.

When this happens, the lender will get a court order to take control of the property with the intention of selling it at auction to repay the outstanding mortgage debt and any other expenses the lender may have incurred as a result of the foreclosure proceedings. 

The best case scenario, obviously, is to avoid a foreclosure, if possible. Here are some options you may want to explore if you find yourself writing cheques your bank account can’t cash.  
 
1. The Bank of Mom and Dad
 
I’m not a huge fan of 'The Bank of Mom and Dad'. Millennials need to get off the parental payroll and onto their own feet, financially speaking. But making use of friends or relatives either by asking them to pay off the entire debt or helping with refinancing by co-signing a mortgage loan is one option that may help you to avoid foreclosure.   
 
2. Rent or sell the property
 
If your property is in a desirable area you can try to sell it quickly or find a roommate or tenant to help pay the mortgage. Contacting a local real estate agent or property management company would be a good place to start when assessing the potential re-sale value or to inquire about area vacancy rates and what you can expect collect in monthly rental.  
 
3. Negotiate
 
Lenders want homeowners to pay their mortgages. The foreclosure process is time-consuming and costly, so they have a vested interested in helping a client through the financial crisis. There may be an opportunity to re-negotiate the mortgage over a longer period of time or at a lower interest rate, or for you to pay a smaller monthly amount for a short period if you've had employment difficulties.
 
In some cases, the foreclosure process might even be stopped by a generous lender when back payments, interest and legal charges are re-paid in full by the investor or homeowner. There are many repayment scenarios and this is why it is so important to speak to your lender early about your financial problems. You don’t make your situation any better by avoiding the phone calls and emails from the bank when your mortgage goes unpaid month after month. Drawing up a repayment plan is also a good idea to formally present your lender with some ideas you have for reimbursement options that will be affordable in the future.
 
4. Friendly foreclosure or a deed-in-lieu
 
A friendly foreclosure basically means you hand back the keys to the property without the bank or mortgage lender having to go to court to force you. The advantage for the investor or homeowner is that they will be immediately released by the lender from the loan and from incurring additional mortgage payments, surcharges and assorted legal fees. Also, the friendly foreclosure is considered a mortgage default which is less disastrous to your credit rating than a forced foreclosure. 
 
5. Bankruptcy
 
This is really a last resort option and doesn't end a foreclosure process, though it might slow it down. In some cases, a home can fall under the bankruptcy exemption rule which means the court will protect the asset from being sold. Remember, you will want independent legal and financial advice before filing for bankruptcy protection.  
 
It is important to avoid letting your financial problems get worse. If you're late on a mortgage payment, talk to your lender immediately about working out a repayment plan. The bank doesn’t want to take your home away, but they do want the money you promised to pay them, with interest, when you bought the property to begin with. [Vanessa Roman wrote about buying a property after a bankruptcy earlier this month.]
 
Sir Francis Bacon is often quoted as saying, “Money is a good servant, but a bad master". When you have it, money can work well to buy just about anything you desire in life. But when you owe it, money becomes the master controlling you in many unpleasant ways.

Vanessa Roman is the host of HGTV's Reno vs Relocation. She is also a licensed real estate agent who divides her time between Halifax and Toronto.