How to Stop a Foreclosure: The Real Estate Investor’s Guide

A foreclosure can be a nerve-wracking prospect for investors. Apart from potentially losing your investment property, it would also have a significant negative impact on your credit score. Having missed three or more mortgage payments, you may be thinking that a foreclosure is inevitable. However, the truth is that you can still salvage the situation at this stage.

You may have fallen behind on your mortgage payments because of unexpected events like job loss, illness, or divorce. However, if you know how to stop a foreclosure, you don’t have to panic, even if the lender has already filed a Notice of Default (NOD). Moreover, you aren’t alone. Many people who have been delinquent have managed to stop a foreclosure.

Without further ado, let’s go through some of the options you have if you want to stop a foreclosure.

Related: Real Estate Investing Challenges & Their Solutions

How to Stop a Foreclosure: 4 Strategies to Consider

1. Apply for a Loan Modification

Losing your rental property was probably the last thing on your mind when you bought it. However, if you know that you are unlikely to meet your mortgage obligation or have already missed some mortgage payments, the best way to stop a foreclosure is to contact your mortgage lender and apply for a loan modification.

Mortgage lenders would rather not have a foreclosure because they are time-consuming, risky, and costly. However, they may be forced to protect their interests when it’s necessary. So not taking any action will only make the situation worse. If you apply for a mortgage modification early enough, you may even be able to prevent the filing of a Notice of Default. The earlier you do it, the better.

If approved, the mortgage lender will change the existing loan terms. The foreclosure will then be stopped provided that you keep up with the modified payments. There are several mortgage modification options to make your investment property mortgage more affordable. The bank could lower the loan amount, monthly payments, mortgage rate, or a combination of these factors. The best option for you will depend on your particular financial situation and the lender’s lending guidelines.

It’s important for real estate investors to remember that a lender has the right not to accept a mortgage modification request if the applicant doesn’t meet their specific criteria. It’s best that you apply for a loan modification when you feel that you are financially capable of making the payments according to the changed loan terms.

Nevertheless, even if your mortgage modification application is not approved, it might be able to delay a foreclosure since the lender could be restricted from dual tracking. It’s illegal for a lender to proceed with a foreclosure sale if an alternative is still under review.

2. Consider a Short Sale

If you are experiencing financial hardship and the NOD has been filed but an auction is yet to be scheduled, one way to stop the foreclosure process is to short sale your investment property.

Even though a short sale will have a negative impact on your financial history, it’s not as bad as a foreclosure. However, you can only apply for a short sale if your investment property is worth less than what you owe. Your mortgage lender also has to approve the short sale before you can proceed with it. They have to be willing to take less than what you owe them.

A mortgage lender will often prefer a short sale to a foreclosure sale because it saves them the time and effort required to sell the property themselves. However, you still need to present them with a reasonable short sale offer. You can use Mashvisor’s investment property calculator to carry out a comparative market analysis to know the market value of your property and come up with the right listing price.

Related: The 12 Steps of a Successful Short Sale Process

3. Consider Filing for Bankruptcy

If you are wondering how to stop a foreclosure when it has already been scheduled, filing for bankruptcy can be an effective option. Even though it’s a complicated move, it will enable you to stop the foreclosure process immediately. During the bankruptcy proceedings, the bank will be prohibited from proceeding with a foreclosure sale.

However, filing for bankruptcy only provides temporary relief but doesn’t let you off the hook with regard to your debts. The foreclosure has only been legally postponed until the bankruptcy is finalized. You will still be required to formulate a practical repayment plan with your mortgage lender.

During this period, you should try your best to get your finances in order. For instance, if you had lost a job, try to get another one. Be sure to consult a bankruptcy lawyer before you decide to use this strategy. This is because it can be a complex, lengthy, and costly process.

4. Ask for a Deed in Lieu of Foreclosure

If you can’t afford mortgage payments but are unable to get a mortgage modification or sell the property, another option for stopping a foreclosure would be through a deed in lieu of foreclosure (DIL).

This is when you voluntarily surrender the deed to your real estate property in exchange for being relieved of the obligation to make payments for the investment loan. Your mortgage lender will then take the property and try to sell it to offset your loan.

Even though a deed in lieu usually has the same effect on your credit as a foreclosure, it’s often viewed more favorably. You might be able to get another loan sooner or rebuild your credit quicker. Due to the high legal risk, however, lenders rarely grant this option.

Related: 6 Types of Loans for Investment Properties in Real Estate

The Bottom Line

Every property investor dreads a foreclosure but few of them realize that it is actually abatable. If you know how to stop a foreclosure, you can buy some time to save your rental property or reduce the potential effects.

If you are facing an impending foreclosure sale, consider one of the above strategies that best suits your situation. I also recommend that you talk to an attorney straight away to guide you through the process.