There are several ways to stop a foreclosure:

Some ways are better than others.  Probably the best way to stop a foreclosure is to do what is called "reinstate".  Reinstate means that the borrower on the note pays back what is owed, with interest and late fees and all fees associated with the foreclosure.  A borrower has a minimum of 106 days to reinstate (up to 5 days before the property is scheduled to sell at an auction) after the notice of default is recorded with the County recorder's Office.  If a borrower cannot come up with all the money during that time to reinstate, then the borrower must use another means to stop the foreclosure.  Filing a bankruptcy will prevent the property from being sold at a foreclosure sale (an auction).  A Chapter 7 Bankruptcy will usually only cause the sale date to be delayed, whereas a Chapter 13 Bankruptcy will allow the past due payments and fees to be paid over a period of time, up to five years.

It is important to note that even though a homeowner may be negotiating a loan modification with the bank, the loan modification process will not stop a foreclosure sale and the bank may still sell the home at an auction.   Often, though, a homeowner may be able to reinstate through a home loan modification, whereby the arrears owed are included in the modified loan. 

The foreclosure process will also be stopped if the loan is "redeemed."  Redeemed means that the loan is paid off in full.  This can happen if the house is sold or refinanced for at least the amount that is owed on the loan.   If the home cannot be sold for the amount that is owed, then a short sale may be necessary.  A short sale consists of an agreement between the borrower and the bank whereby the bank agrees to take what it can from the sale of the property, and forgive the balance.  Similarly, a deed in lieu of foreclosure is a deed which conveys title back to the bank in return for a promise by the bank to stop the foreclosure process and not sue the borrower for the balance due.   Neither a  short sale nor a deed in lieu of foreclosure may be possible if there is more than one loan securing the property (a first and a second). 

   WARNING: Sometimes a bank will want the homeowner to agree to owe the balance due on a note after a "short sale" or after conveying a deed "in lieu of" foreclosure.  Watch out for these schemes as the homeownner may be better off by letting the house sell at a foreclosure sale.

There are less favorable ways to stop a foreclosure, which I do not recommend.  The bank holding the note may offer what it calls a "deferment".  These agreements usually allow the bank to sell the home without giving the homeowner notice; generally not a good thing for the homeowner.  There are also various schemes where someone will offer to pay the homeowner's reinstatement amount in return for the homeowner's title.  The homeowner is promised that title will be returned to him when the homeowner refinances or pays back the debt with interest.  These schemes are almost always fraudulent and illegal.  It is highly recommended one stay away from them.  

CALIFORNIA 90 DAY MORATORIUM:  

     According to the new California Civil Code, Section 2923.5, starting, Monday, June 15, 2009, there will be a 90 day moratorium put on all California foreclosures to encourage loan modifications (with some exceptions).  If you have been contemplating a home loan modification, now is the time to start.  The statute is cited below:

Sets forth the conditions for EXEMPTIONS FOR MORTGAGE LOAN SERVICERS from the 90 day hold on Notices of Sale if the servicer has implemented a comprehensive loan modification program including the features set forth in the statute:

(1) The program is intended to keep borrowers in their homes when the anticipated recovery under the loan modification exceeds the anticipated recovery through foreclosure.

(2) The program targets a ration of borrower's housing related debt to the borrower's gross income of 38% or less.

(3) The program included an interest rate reduction or deferral or extension of the amortization period or compliance with a federally mandated loan modification program as detailed in the statute.

Civil Code §2923.54

(a) The Legislature finds and declares that any duty servicers may have to maximize net present value under their pooling and servicing agreements that is owed to all parties in a loan pool, not to any particular parties, and that a servicer acts in the best interests of all parties if it agrees to or implements a loan modification or workout plan for which both of the following apply:

(1) The loan is in default, or payment default is reasonably foreseeable.

(2) Anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.

(b) It is the intent of the Legislature that the mortgagee, beneficiary, or authorized agent offers the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.

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If My House is Foreclosed on, Will I Owe Anything?

You could owe what is called a deficiency balance in the following situations:

Often, a homeowner will not be liable for an amount due after the foreclosure sale of his or her home.  However, there are important exceptions to this rule.  If a second loan secured by the property was obtained at a date after the original purchase, the homeowner could be liable to the holder of the second note.  Also, if a homeowner has refinanced his or her home, the homeowner could be liable for a partial deficiency.  Likewise, if the property is not the residence of the borrower, then the borrower could be liable to a non-foreclosing note-holder after the foreclosure sale.

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Can I modify my Loan?

Banks are more willing than ever before to modify home loans.   Because so many homes are "upside down" in value, banks stand to lose a great deal of money if your house gets sold at a foreclosure sale.  This fact alone gives you the borrower negotiation leverage.  Also, many loans, like Adjustable Rate Loans, were made to borrowers who would never have the means to pay the loan back once the "Adjusted Rate" took effect; this raises serious legal and ethical issues which banks and their brokers would rather avoid. 

Also, at least in San Bernardino and Riverside Counties, a completely unsecured second (and third and fourth) loan can be completely stripped from a homeowner's property through a Chapter 13 Bankruptcy.  This fact too gives homeowners tremendous leverage to negotiate a favorable modification.

As the foreclosure crisis has continued, banks have become more savvy in creating home loan modifications which tend to benefit both the bank and the homeowner.  Because the real estate market is cyclical, many banks are now allowing homeowners to defer making larger payments until many years later, when it is believed their homes will be back up to the values they once were.  These types of modifications benefit the homeowners because they are able to reduce their monthly payments for many years, and these agreements benefit the banks because the bank will, eventually, get most if not all its money back with interest when the property increases in value.

How Will my Credit Report Be Affected?

It is unknown how credit reporting companies calculate a credit score as this information is proprietary.  However, it is general knowledge that if you are already behind in your home payments, your credit score is getting lower every month you stay behind.  A foreclosure sale will substantially lower your credit score.  The amount it will affect your credit score depends on the amount you owe, the number of loans you have and other criterion.  Likewise, a bankruptcy will substantially lower your credit score.  Again, the amount it affects your credit score depends on the amount and number of debts included in the bankruptcy. 

However, once the bankruptcy is filed, your credit stops getting worse and should start to improve.  If you file a Chapter 13 Bankruptcy, you will make monthly payments to the Chapter 13 Trustee, these payments will be reflected on your credit report as revolving debt and will cause your credit score to improve each month.  Many people report that after making 3 years of Chapter 13 payments, that their credit score is higher than it was before they filed for bankruptcy.  Furthermore, their credit score is higher than it would have been had they never filed bankruptcy because, had they never filed bankruptcy their credit score would have continued to get worse and worse each month.  Likewise, when a Chapter 7 Bankruptcy is filed, a debtor can begin to improve his credit score because he will no longer have delinquent debts being reported each month, and because he can now pay back the new revolving debt he incurs on time.