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How You Can Stay in Your House Payment Free

The basic concept of foreclosure is that when a house is sold at an auction, the lender will recover the amount of the mortgage, and the new owner will move in and live happily ever after. Or maybe an investor will buy the home, rent it out for a while (maybe to you), benefit from some tax write-offs, and then sell it when it has gone up in value.

The thing is, that’s not how it works these days. Unfortunately for the banks and investment communities, neither of these scenarios reflects reality for one simple reason: Prospective buyers are unwilling to offer the minimum bid—typically the amount necessary to pay off the first mortgage. And so the lender is stuck with property it doesn’t want. Lenders aren’t landlords; few have divisions that can rent the property out, manage it, and resell it when the time is right.

Primarily for this reason, lenders are putting off foreclosure proceedings as long as possible, in the hopes of working something out with the homeowners to keep them in their houses—and keep at least some mortgage payments flowing in. If, early on, you decide that you don’t want to keep the house and will ultimately be moving on, you may be able to skip payments for many months before foreclosure is finally begun. And even after the foreclosure sale, chances are great that you can keep living in the house for a while longer free of charge. In all but a few states, you can stay in your house until the new owner gives you a formal written notice demanding that you leave. (See your state’s page in the appendix.)

Having payment-free shelter for many months—both before the foreclosure action is brought and after the sale—gives you a golden opportunity to save some money. And that will grease the skids when you do have to find a new place to live. (See Ch. 9 for more on how to come out of foreclosure with some cash in your pocket.)