What Is Foreclosure?
Foreclosure is the legal process banks and other mortgage lenders use to recoup their losses when borrowers stop making payments on their mortgage loans.
When a borrower uses a mortgage to purchase a property, they agree to make monthly payments to their lender until they’ve paid back the home. If a borrower is no longer able to make their payments on the loan, often due to financial hardship such as a job loss, the lender will try to earn back some or all of what they’re still owed by taking ownership of the home and selling it.
When a home is foreclosed on, the homeowner is evicted from the property and the foreclosure is recorded on their credit report, severely impacting their credit score.
How To Avoid Foreclosure
If you aren’t yet to the point where you’re missing payments but anticipate that you might be heading in that direction, or want to make sure you have a safety net in case you end up in a tight spot financially, here are some things you can do to prevent a foreclosure from ever happening in the first place.
Make Monthly Mortgage Payments
Obviously, prioritizing your monthly mortgage payments is important. However, while most people who end up in foreclosure understand the importance of making those payments, they often simply don’t have the funds to keep doing so.
This is why having an emergency savings account or other liquid assets is so important. If you’re able to do so, saving up a few months’ worth of living expenses can go a long way in ensuring that if something bad happens, you’ll have some cash to keep yourself afloat for at least a little while.
If you lose your source of income, for example, this emergency money can give you enough time to find another job without having to worry about losing your home.
If your mortgage payment is starting to stretch your budget a little too thin, it might be a good idea to look into whether refinancing your mortgage would lower your monthly payments.
This can be a helpful solution for those who are still able to make payments on their mortgage but, due to a reduction in income, added household costs or a monthly payment increase on an adjustable-rate mortgage, are starting to feel overly burdened by their monthly housing payment.
It’s also always a good idea to keep in frequent contact with your lender if you anticipate issues with making payments. In most cases, your lender would much rather work with you to find a solution that keeps you in your home rather than having to go through the process of foreclosure, which can be lengthy and expensive for them.