Can They Foreclose During a Loan Modification?

If you’ve fallen behind on your mortgage, a loan modification can be a powerful tool to make your payments more affordable and avoid foreclosure. But many homeowners wonder – can the lender still foreclose on me while I’m going through the loan modification process?

Unfortunately, the answer is yes. There is no ironclad protection to stop foreclosure proceedings just because you’ve applied for a mortgage modification or are negotiating new loan terms.

In this comprehensive guide, we’ll explain:

• How foreclosures and modifications work
• The risks of foreclosure during modification
• Steps you can take to prevent foreclosure
• Alternatives if modification falls through

Understanding the complex interplay between modifications and foreclosures is key to keeping your home.

How Foreclosures and Modifications Interact

To understand why lenders can foreclose during a modification, it helps to know how both processes work:

Foreclosure Process

• You miss payments and go into default
• Lender sends notice of default and intention to foreclose
• Public auction scheduled about 120 days later
• Home sold at auction if default not cured

Loan Modification Process

• You apply and submit documents to lender
• Lender reviews and decides on modification terms
• Negotiations finalize new loan terms
• Modification agreement signed

As you can see, these are two distinct processes within the lender’s organization. The foreclosure side is proceeding on the original loan terms. The modification side is trying to change the terms.

This means foreclosure marches forward unless actively stopped by the modification being completed.

The Risks of Foreclosure During Modification

Allowing foreclosure proceedings to continue during a modification is risky for the homeowner:

• Auction could occur before modification completes – If negotiations drag on and no firm offer is made, the home could be sold at foreclosure auction even as you think the modification will come through.

• Pressure to accept unfair terms – The looming auction date can force homeowners to accept modification terms they can’t afford just to stop the foreclosure.

• Foreclosure fees accruing – Attorney fees, court costs, and other foreclosure fees add up, making reinstatement more expensive.

• Tax and credit consequences – A foreclosure auction harms your credit report and may trigger tax liability even if the home isn’t ultimately lost.

• Cloud on property title – Bidder interests at a halted auction can complicate future refinancing or sale.

Clearly, allowing a modification and foreclosure to play out simultaneously poses risks. So what can be done?

Steps to Stop Foreclosure During Modification

If you face possible foreclosure during a loan modification, you aren’t powerless – there are steps you can take:

Communicate urgency to your lender – Call Loss Mitigation daily and stress that you need an immediate foreclosure hold while modification is negotiated. Escalate to managers if needed.

Submit modification documents quickly – Pull together needed paperwork right away so the lender can make a rapid decision. Fax or overnight mail everything to expedite.

Leverage state foreclosure laws – Research if state law requires “dual tracking” protections during modifications to delay auction.

Engage foreclosure defense counsel – Attorneys can negotiate with the lender to pause foreclosure. They also can contest a wrongful sale in court.

File bankruptcy – Chapter 13 bankruptcy stops all collection and foreclosure action with firm legal protections. It can provide time to finalize a modification.

Make partial payments – Paying anything shows good faith effort to avoid foreclosure. Even small amounts help if you genuinely can’t afford the full payments.

With persistence and utilizing available protections, there are ways to prevent a modification and foreclosure from destroying your home ownership hopes.

Alternatives If Modification Falls Through

Ideally the loan modification will be completed in time to permanently stop the foreclosure. But sometimes lenders deny modifications, negotiations fall apart, or paperwork issues cause delay. If your modification efforts fail:

Reinstate the loan – Reinstatement pays the account up to date if you get a windfall. This instantly stops foreclosure.

Sell the property – A short sale generates sale proceeds that satisfy the debt so the lender takes no loss.

Deed the property back – A deed-in-lieu of foreclosure hands over ownership, avoiding a lengthy auction process.

Claim fair lending violations – If wrongfully denied based on prohibited factors like race, sue to reverse lender’s decision.

File bankruptcy – As a last resort, Chapter 7 bankruptcy discharges unsecured mortgage debt or Chapter 13 cures arrears over time.

With preparation and a backup plan, you can respond to the worst-case of an unsuccessful modification and still preserve ownership or exit the situation gracefully.

Partnering With Experts

Navigating the dual track of modification and foreclosure is tricky. Having experienced experts on your side makes all the difference. Consider partnering with:

• HUD counselors – Free assistance from unbiased HUD-certified housing counselors who advocate for you in dealing with lenders.

• Foreclosure defense lawyers – Attorneys with legal tools to delay or stop foreclosure if negotiations hit snags.

• Bankruptcy attorneys – Chapter 13 bankruptcy lawyers able to pause foreclosure with court protections while increasing modification leverage.

• Real estate agents – For short sale expertise if modification is denied.

The bottom line is that while lenders can continue the foreclosure process during modification negotiations, you are not helpless – with diligence and strong allies, protection from wrongful foreclosure is possible. The key is being proactive so you have backup plans ready, just in case. Staying one step ahead is how to keep your home.