With the record job losses caused by the Covid-19 pandemic, many families are having difficulties making their monthly mortgage payments. Taking a proactive approach to dealing with your mortgage servicer will help reduce the chance that you lose your home due to foreclosure.
You have better options than letting your home fall into foreclosure.
During difficult financial times, some people allow their home to fall into foreclosure before taking action. That is never the best option. In many cases, you may be able to work with your mortgage servicer to avoid foreclosure and save your home.
Even if your current financial situation means keeping your home is not possible, it is still better to try to work with your mortgage servicer to reach some type of arrangement instead of foreclosure. For one thing, the price of your home in a foreclosure sale will generally be lower than its fair market value. This means that, if you have equity in your home, you are unlikely to recover it in a foreclosure. Also, if the foreclosure sale price is less than what you owe on your mortgage, the lender may also choose to pursue you for the difference between the foreclosure sale price and the amount you owe on the property.
You may have protections under federal law that may help you save your home if you act timely.
If you have a federally-backed mortgage (e.g., FNMA/FMAC, FHA, VA, and USDA), certain federal consumer protection statutes may help you avoid foreclosure.
2020 CARES Act Protections.
Congress passed the CARES Act in March of 2020 to help mitigate the economic losses caused by Covid-19. The CARES Act provides that borrowers who are experiencing financial difficulties due to the Covid-19 crisis may submit a forbearance request to their lender. If the borrower has a federally-backed non-jumbo loan, the servicer is required to grant the request. It is not allowed to charge penalties, fees or interest to the borrower.
This protection does not apply to non-federally backed mortgages, such as those from smaller lenders. It also does not apply to borrowers with jumbo mortgages (in most areas, mortgages loan amounts greater than $484,350).
In 2013, the Consumer Financial Protection Bureau adopted regulations under the Real Estate Settlement Procedures Act that require a mortgage servicer to cooperate with their borrowers to mitigate the damage that may result from falling behind on their mortgage. While the regulations do not require the servicer to offer any specific rights to borrowers, it does require the servicer to delay any efforts to foreclose if the borrower asks for their loss mitigation options and it requires the servicer to provide accurate information about the borrower’s options. If a servicer fails to provide accurate information in response to the borrower’s request for loss mitigation options, the servicer could potentially be liable to the borrower under federal consumer protection statutes.
Communication with your Servicer or Lender Is Critical.
The key to triggering these federal consumer protections is for the borrower to ask the servicer to identify their options. The servicer has no obligation to offer forbearance or other loss mitigation options if they are not requested. Also, to the extent possible, it is best to conduct as many of these communications with the lender by email or in writing, and ask for the terms of the forbearance in writing so that you can confirm the details.
If the servicer receives a request for forbearance under the CARES Act and the request meets the requirements, the servicer is required to comply. If the servicer receives a request for loss mitigation under RESPA, it will ask the borrower for certain information in order to determine the borrower’s options.
If the borrower provides all requested information more than 37 days prior to any scheduled foreclosure sale then the lender cannot forward with the scheduled foreclosure while it evaluates the information and identifies any available options.
If the Federal Consumer Protections Do Not Apply to your Mortgage, a Borrower May Be Able to Avoid Foreclosure through Bankruptcy.
Even if you are not protected by the Cares Act or RESPA protections, you still may be able to avoid foreclosure on your home through bankruptcy. In a Chapter 13 bankruptcy, the court will set a payment schedule for the borrower to make up any past due payments. As long as the borrower makes those payments as well as their current payments, the bankruptcy laws will prevent the servicer from foreclosing. These protections only apply if you file for bankruptcy prior to foreclosure. Once your home has been foreclosed on, it is too late.