How to Avoid Foreclosure by Reducing Your Mortgage

When times get tough, it is no wonder that many homeowners have to take out second mortgages on their homes, and even home equity loans. Sometimes homeowners choose to take on additional mortgage obligations even in good times in order to gain funds for home improvement projects, business ventures or the like.

Faced with all of these obligations, making monthly payments on these loans can be quite a financial burden. Many people wonder, faced with these difficulties, how to avoid foreclosure or selling their home. In almost every situation, it is best to stay current with the first loan on your home and delay or make reduced payments on the subsequent loans. Usually only the first and second home loan providers have the ability to foreclose on your home.

If it is possible for you to pay the one or two lenders that could foreclose on your home and avoid paying the others, this could help you avoid foreclosure. By doing this, you have more money to pay your primary lenders with and, at the same time, have a better chance of staying in your home.

Here is how it could work for you:

The Basics of Mortgage and Foreclosure:

When you first took out the loan for your home, you probable secured the loan by giving the bank a mortgage or deed of trust on the home you bought. This relationship gives your lender a legal claim to your home. Under the terms of this arrangement, the lender has the power to enforce its legal claim on your home through foreclosure proceedings if you fail to live up to your side of the contract. In order to avoid foreclosure, you must make your payments on the loan. If the lender does foreclose on your home, your home will be sold, either at auction or through a private sale, and the proceeds of that sale will go towards the remaining amount on your mortgage.

Depending upon the state you live in, the legal relationship that you have with your lender will either be in the form of a mortgage or a deed of trust. These terms are generally used interchangeably.

The order and name of a loan is dependant on the when the loan was taken out and in what order it was taken out in relation to the other loans secured by your home. For example, the first loan that is taken out on your home, which is often the loan used to make the original purchase, is called the first mortgage. This mortgage is recorded first and should also be paid off first. If a subsequent loan is taken out on the home, this is called a "second mortgage," and should correspondingly be paid off second. Other loans, called home equity lines of credit, can be taken out and secured by your home as well. As with the other mortgages, the lenders for these additional loans also have the option of foreclosing on your home if you do not pay the loan back.

The name of the loan is not only important for your records, but it is also important for the lenders as well. If your home is foreclosed on and sold, either through private sale or auction, the lenders are paid off in order of the seniority of their loans. This means that the lender on the first mortgage gets paid first, the lender on the second mortgage gets paid next, and so on. Depending on the value of your home, the lenders on a second or third mortgage might not get paid at all in the event of a foreclosure. Because of this system, it makes it more likely that a holder of a second or third mortgage has less incentive to initiate foreclosure proceedings because they may not get paid at all.

Loans Without Enough Equity

In recent years, many banks were willing to lend money to home-buyers who did not have good credit or a sizable amount of money as a down payment. This was because of the rapid increase in home value that was seen across the nation. Banks were reasoning that, even if a home-buyer defaulted on their loan, the bank could recoup all of its losses and more by initiating foreclosure proceedings. For example – a risky home-buyer would come to a bank and ask for a loan to buy a $200,000 home. The bank would do some research and see that the property values in that area were expected to rise at a fast pace in the coming years. Even if the home buyer defaulted, the bank could be secure in its knowledge that it could foreclose on the home and reasonably expect to sell it at auction for $300,000. For a while, this strategy worked and banks were running record profits on their mortgages.

The Real Estate Market Crash

However, the risk finally came back to haunt the banks when property values across the country declined sharply, with homes dropping in value by 50% or more in some areas. These decreases in home value erased much of the equity that had accrued in the real estate market during the previous years.

What does this mean for homeowners that are behind in their mortgage payments?

Many people often wonder how to avoid foreclosure. Because of the recent drop in property value, homeowners who have had the value of their homes drop and are also behind in their mortgage payments are less likely to face foreclosure. This is because the banks and lenders are less likely to recoup their losses through foreclosure proceedings.