Behind on Your Mortgage in Texas? Your Options, from Loan Changes to Foreclosure

If you’re behind on your mortgage, or you can see it coming, the most important thing to know is that you have more options than you think. You also have less time than you think. In Texas, the window between a missed payment and a foreclosure sale can be shorter than in most states, and every option gets harder to use the longer you wait.

Falling behind happens for all kinds of reasons: a job loss, a divorce, a medical bill, an adjustable rate that reset, or a home that’s now worth less than the loan. None of those make you a bad borrower. What matters now is understanding how the process works here and what your choices are, from the ones that keep you in the home to the ones that let you leave on the best terms possible.

How foreclosure works in Texas

Most Texas foreclosures never go before a judge. The deed of trust you signed at closing gives the lender the right to sell the home through a trustee if the loan goes into default. That’s why the process can move quickly once it starts.

Here’s the general order of events for a home you live in:

1. You miss payments. Federal rules generally keep a servicer from starting foreclosure on most home loans until you’re more than 120 days behind. That four-month window is the best time to act.
2. Notice of default. The servicer sends a letter by certified mail giving you at least 20 days to catch up on the past-due amount. During that time you can bring the loan current by paying what you’re behind, not the full balance.
3. Notice of sale. If the default isn’t cured, the servicer can send a notice of sale at least 21 days before the sale date. It’s also posted at the courthouse and filed with the county clerk.
4. The sale. Texas foreclosure sales happen on the first Tuesday of the month, between 10 a.m. and 4 p.m., at the county courthouse or another place the county sets. If that Tuesday is January 1 or July 4, the sale moves to the first Wednesday.

From the first certified letter to the courthouse steps can be little more than six weeks. Your loan documents may give you more time than the law requires, so read them, but don’t count on it.

Option 1: Call your lender before you fall further behind

The hardest call to make is also the one that keeps the most doors open. Lenders generally don’t want your house. A foreclosure costs them time and money, so most servicers have a team whose job is to work out alternatives, often called loss mitigation.

Depending on your loan and your situation, they may offer:

• A repayment plan, where you add part of the past-due amount to your regular payment for a set number of months.
• Forbearance, where payments are paused or reduced for a short time while you get back on your feet, usually after a job loss or illness.
• A loan modification, where the lender changes the terms, such as the rate, the length of the loan, or the balance, so the payment fits what you can afford long term.

Expect to send income information, bank statements, and a short letter explaining what happened. Keep copies of everything you send and write down who you spoke with and when. If you’re working with your servicer on a complete application, federal rules limit their ability to move ahead with a sale while it’s being reviewed, which is one more reason to start early.

If you want to keep the home and your income can support it going forward, this is the option to try first.

Option 2: A short sale

If you owe more than the home would sell for, or you simply can’t keep it, a short sale lets you sell for less than the loan balance with the lender’s permission. The lender agrees to accept the sale proceeds and release its lien so the buyer can close.

A short sale takes more patience than a regular sale:

• The lender has to approve it. You’ll submit a hardship letter and financial documents, and the lender reviews the buyer’s offer before saying yes. That review can take weeks or months.
• You stay involved in the sale. You keep living in the home, keep it in showing condition, and work with your agent to market it at a price the lender will accept.
• It’s usually easier on your credit than a foreclosure, and you leave on a date you know ahead of time instead of one set by the courthouse calendar.

Every lienholder has to agree. If you have a second mortgage, a home equity loan, or a home equity line of credit, that lender has to sign off on the short sale too, and so does anyone else with a lien on the property. Common ones include an HOA lien for unpaid dues, a mechanic’s lien from a contractor who wasn’t paid, and tax liens for unpaid property taxes or federal taxes. All of them have to be paid or released before the sale can close. The first lender usually gets most of the sale proceeds, and the second lienholder is often asked to accept a small payment to release its lien. Getting every lender to agree to the same numbers on the same timeline is often the hardest part of a short sale, so expect it to take time and push back.

Choose your agent carefully. A short sale is a very different job from a regular listing. Make sure the agent you hire has real experience handling short sales, because that can make all the difference.

The most important question in any short sale is what happens to the difference between what you owe and what the home sells for. That gap is called the deficiency. Before you sign the final approval, get it in writing that the lender waives its right to collect the deficiency. If the approval letter is silent or says the lender keeps that right, have a real estate attorney review it before you close.

Forgiven mortgage debt can also have tax consequences, so it’s worth a conversation with a tax professional.

Option 3: Giving the keys back (deed in lieu of foreclosure)

A deed in lieu of foreclosure is exactly what it sounds like. Instead of going through a foreclosure sale, you sign the home over to the lender voluntarily, and the lender takes it back in place of the debt.

It can’t just be done by dropping the keys at the bank. The lender has to agree, and most will only consider it after a short sale has been tried or ruled out. Lenders also generally want a clean title, so a second mortgage, a home equity loan, or other liens can make a deed in lieu hard to get.

When it works, it can be a quieter, more dignified way out than a foreclosure. You agree on a move-out date, there’s no public sale, and some lenders offer help with moving costs.

The same warning applies here as with a short sale: make sure the agreement says in writing that the lender releases you from any remaining balance. Without that, giving the keys back doesn’t necessarily end what you owe.

If the home goes to foreclosure

If none of the other options work out, the home is sold at the courthouse on the first Tuesday of the month. A few things are worth knowing ahead of time.

It stays on your credit the longest. A foreclosure generally does more damage to your credit, and keeps you from buying again for longer, than a short sale or a deed in lieu. That’s a big reason to look at the other options first, even if keeping the home isn’t possible.

You may still owe money. Texas allows a lender to sue for the deficiency, the difference between what you owed and what the home sold for, as long as it files within two years of the sale. There’s an important protection in the law: if you’re sued, you can ask the court to determine the home’s fair market value on the day of the sale. If the home was worth more than it sold for, you get credit for the difference. That keeps a lender from buying the home cheaply at the sale and then charging you for a shortfall that wasn’t real.

Don’t let a foreclosure turn into an eviction. After the sale, the new owner can file to evict you if you’re still living there. A foreclosure is hard enough, but an eviction on your record on top of it can make it very difficult to rent an apartment or a house, right when you need a place to go. Landlords check for both. Line up your next home and plan your move before the sale date, not after, so the foreclosure is the only mark you have to recover from.

Where to get help

You don’t have to figure this out alone, and good help is often free.

• A HUD-approved housing counselor. These counselors help homeowners understand their options and work with their lenders at no cost. You can reach HUD’s counseling line at 1-800-569-4287 or search for a counselor near you on HUD’s website.
• A real estate attorney. If you’re facing a sale date, being asked to sign a short sale or deed in lieu agreement, or being sued for a deficiency, an attorney can tell you how the law applies to your situation.
• Your loan documents. Your deed of trust and any letters from your servicer spell out your deadlines. Read them, and keep every notice you receive.

Watch out for foreclosure rescue scams. Be very careful with anyone who promises to save your home for an upfront fee, tells you to stop talking to your lender, or asks you to sign your deed over to them. A legitimate counselor won’t charge you to talk with your lender. If something feels wrong, you can check with the Texas Attorney General’s office before you sign anything.

The earlier you act, the more of these options are still on the table.

This article is general information, not legal or tax advice. For advice about your own situation, talk with a Texas attorney or tax professional.

If you have questions about selling a home in a difficult situation, feel free to reach out.

Sources

• Texas State Law Library: Foreclosure, Before the Sale
• Texas Property Code § 51.002: Sale of Real Property Under Contract Lien
• Texas Property Code § 51.003: Deficiency Judgment
• Texas Department of Housing and Community Affairs: Foreclosure Prevention Resources for Homeowners