6 Ways to Stop or Avoid Foreclosure (and When Selling Makes Sense)

• Servicer: the company that sends your statement and takes your payment. It may not be the original lender.
• Delinquent: behind on payments.
• Loss mitigation: the servicer's word for options that help you avoid foreclosure.
• Notice of default: a formal letter saying you have broken the terms of the loan, usually by missing payments. It is often an early step toward foreclosure.

Federal mortgage servicing rules give most homeowners some breathing room. The Consumer Financial Protection Bureau (CFPB) summarizes them this way:

• Your servicer must try to contact you soon after you miss a payment and send written information about your options.
• In general, a servicer may not make the first foreclosure notice or filing until you are more than 120 days behind.
• If you send a complete application for help more than 37 days before a scheduled foreclosure sale, the servicer must evaluate you for all available options before it can go ahead with the sale.
• If you apply 90 days or more before a sale and are denied a loan modification, you can generally appeal.

These rules have exceptions, and federal rules can change. The practical lesson stays the same: apply early, send everything the servicer asks for, and keep copies.

The CFPB also warns that you do not have to pay anyone to help you avoid foreclosure. Help is free from your servicer and from HUD-approved counselors. Be wary of anyone who asks for money up front.

A loan modification is a permanent change to your loan terms so your monthly payment is lower. The CFPB notes that servicers usually start with a trial modification for a few months to confirm you can make the new payment.

Pros

• You keep the home.
• The payment may become affordable for the long term.

Cons

• It requires a full application: income, bank statements, and a hardship letter.
• The loan may last longer, or you may pay more interest over time.
• Approval is not guaranteed.

Best for: a lasting drop in income where a lower payment would be sustainable.

Forbearance lets you pause payments or pay less for a set time. Nothing is forgiven. When it ends, you repay what you skipped. That can be one lump sum, a higher payment for a while, or an amount added to the end of the loan. Interest may keep adding up.

Pros

• Quick relief during a short-term setback, such as a medical leave or a gap between jobs.

Cons

• You still owe everything. Ask for the repayment terms in writing before you agree.

Best for: a temporary hardship with a clear end date.

A repayment plan is an agreement to add part of the past-due amount to your regular payment until you are caught up. The CFPB notes the servicer may keep reporting the delinquency and could still start foreclosure until you are fully current.

Reinstatement means paying the full past-due amount, plus fees, at once to bring the loan current. Once a loan is in default, a servicer can refuse partial payments and require the whole amount.

Pros

• You keep the home and your original loan terms.

Cons

• A repayment plan means higher payments for a while.
• Reinstatement requires a large sum of cash.

Best for: your income has recovered, or money is coming (such as a bonus or a family loan).

Refinancing replaces your current loan with a new one. The CFPB lists it among the options to ask about.

Pros

• It may lower your payment or let you tap equity to pay off the arrears.

Cons

• It is often hard to qualify once you are behind. Late payments hurt your credit, and lenders look closely at recent payment history.
• There are closing costs.

Best for: homeowners with solid equity and credit who are only slightly behind, or who can bring the loan current first.

A short sale is a sale for less than you owe. Your servicer must approve it. The gap between the sale price and the loan balance is called the deficiency. In some states the lender can pursue you for it. The CFPB suggests asking the lender to waive the deficiency and getting that waiver in writing.

Pros

• It is generally seen as a more orderly exit than foreclosure.

Cons

• You leave the home.
• It can take months, and the servicer controls the timeline.
• There may be tax effects (see below).

Best for: you owe more than the home is worth and cannot afford to stay.

With a deed-in-lieu, you voluntarily transfer ownership to the lender instead of going through foreclosure. As with a short sale, ask in writing whether it settles the full balance. The CFPB also suggests asking about "cash for keys" help with moving costs.

Pros

• It avoids a public foreclosure sale and can be simpler than a short sale.

Cons

• You leave the home and give up any equity.
• Lenders often want you to try a sale first.

Best for: you are underwater, a sale has not worked, and you want a clean exit.

If your home is worth more than you owe, selling before a foreclosure sale may let you pay off the loan and keep what is left. You will need a payoff statement from your servicer showing the exact amount due.

Listing with an agent

• Usually brings the highest price.
• Takes time: preparation, showings, buyer financing, closing. Repairs may be needed.
• Works best when you have several months and the home shows well.

Selling directly to a buyer or investor

• Can close faster, often as-is, with fewer contingencies.
• The price is usually lower than a well-marketed listing.
• Works best when time is short or the home needs major work.

Get more than one opinion of value. Compare the net amount you would keep, not just the headline price.

If you lived in the home as your main residence for at least two of the last five years, you may be able to exclude up to $250,000 of gain ($500,000 for most married couples filing jointly) from income.

Credit. Late payments, a short sale, a deed-in-lieu, or a foreclosure can all show up on your credit report. The CFPB says credit bureaus can generally report most negative information for seven years. How a specific option affects your score depends on your full history.

Taxes on forgiven debt. When a lender forgives debt, the IRS generally treats the forgiven amount as taxable income. You may receive a Form 1099-C. There are exceptions:

• A special exclusion for forgiven debt on a main home covered discharges before January 1, 2026, or those under a written agreement made before that date. Unless Congress extends it, it does not cover newer forgiveness. Check the current rule.
• You may still be able to exclude some or all of the debt if you were insolvent, meaning your debts were larger than your assets, right before the debt was forgiven.
• A foreclosure or short sale may also be treated as a sale that creates a gain or loss.

Talk to a tax professional before you sign a short sale or deed-in-lieu agreement.

These resources were listed on official sites when this article was written. Call to confirm they are still current.

• Anywhere: Find a HUD-approved counselor through the CFPB's search tool or at (855) 411-2372. The HOPE Hotline, (888) 995-4673, is listed by the CFPB.
• District of Columbia: The Department of Insurance, Securities and Banking runs a Foreclosure Mediation Program for owners of residential property who have received a notice of default. DC's housing department lists counseling for homeowners who are behind.
• Maryland: The state's HOPE Hotline is 877-462-7555. Owner-occupants who receive a "Final Loss Mitigation Affidavit" have a right to foreclosure mediation. The state advises not waiting until mediation to seek help.
• Virginia: If your loan is with Virginia Housing, its Borrower's Assistance Program reviews you for home-retention options. Other Virginia homeowners can use the HUD counselor search above.

An attorney can explain your rights under state foreclosure law, and whether other tools, such as bankruptcy, apply to you.

If you would like a second set of eyes, we offer a free 20-minute consultation and a written Options Report comparing each path above for your situation, including the ones that don't involve selling to us. If selling to Brightline isn't the best fit, we will tell you.

• CFPB: If I can't pay my mortgage loan, what are my options?
• CFPB: Summary of foreclosure avoidance procedures
• CFPB: 12 CFR 1024.41, Loss mitigation procedures
• CFPB: Letter from my servicer about my application (loss mitigation terms)
• CFPB: What is mortgage forbearance?
• CFPB: What is a repayment plan on a mortgage?
• CFPB: Servicer requires the whole past-due amount
• CFPB: What is a short sale?
• CFPB: What is a deed-in-lieu of foreclosure?
• CFPB: How long does information stay on my credit report?
• CFPB: Find a housing counselor
• IRS Topic No. 431, Canceled debt
• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
• IRS Publication 523, Selling Your Home
• DC DISB: Foreclosure Prevention
• DC DHCD: Foreclosure Prevention Resources
• Maryland DHCD: Foreclosure Prevention
• Maryland Office of Financial Regulation: Foreclosure Help for Homeowners
• Virginia Housing: Foreclosure Prevention Options