Foreclosure Options
There's no doubt about it. Most people who are faced with foreclosure become paralyzed into inaction from not knowing any of their foreclosure options or (in the opposite extreme) from being bombarded with too much information thrown at them by everyone trying to "help" them out of their situation.
If you find yourself facing foreclosure, please do yourself a big favor. Educate yourself through your own research so you can take control of your situation and make the right decisions on how to best move forward. You have many foreclosure options and alternatives that can stop or prevent your foreclosure.
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Evaluating Your Options
Below is a list of your foreclosure options in the order of what is generally considered best to worst:
• Loan Modification - This is by far the best solution to pursue if you qualify. The federal government has created a program called HAMP (Home Affordable Modification Program) which focuses on stopping foreclosure by mandating banks who accepted the government's bail out money to modify homeowners' loans to make their monthly payments affordable. If you don't qualify for HAMP, you can be eligible for traditional loan modification.
• Forbearance Agreement - If your situation is caused by a temporary reduction in income and you anticipate to get back on track in the near future, a forbearance agreement is a good alternative to foreclosure. Another situation where this would work is if you need to stop the foreclosure temporarily so you can execute either a market sale, short sale, or a refinance.
When a lender approves a forbearance agreement, they usually create a repayment plan where they take the delinquent amount, divide it into the amount of months they've allowed for the forbearance period (usually 6-12 months), and add it on top of your regular monthly payments. Obviously, if you were struggling to make your payments before, temporarily higher payments may prove too much to bear, so most people will actually borrow the money from a relative, or a friend.
The biggest benefit of a forbearance plan is to prevent foreclosure during a temporary financial setback.
• Re-instatement - This is one of the easiest foreclosure options if you are able to obtain the money to pay your delinquent payments and re-instate your loan. It will automatically stop your foreclosure. Please check the laws in your state to see if there is a certain window within the foreclosure process where your lender has the right to refuse a re-instatement and require a full repayment of the entire loan instead. In California, lenders don't have to accept a re-instatement 5 days before the trustee sale. Although in my experience, most lenders will take a re-instatement even at the last minute. But just to be safe, you shouldn't wait until the very last minute to re-instate your loan to stop foreclosure because if things don't go smoothly, you will not have time for any other remedies.
• Refinance - If you are already late on your payments, your credit has more than likely taken a hit, and if a Notice of Default has already been recorded, your credit has more than likely taken a dive. If this is the case, refinancing with a traditional lending institution such as a bank as a foreclosure option is basically impossible. However, if you have a substantial amount of equity, you may qualify for a hard money loan. If you have at least 40% equity or higher (ex: If your property is worth $100,000 then you can get a loan up to 60% or $60,000). The benefit of a hard money loan is to be able to either payoff your existing loan amount or to borrow a 2nd mortgage or HELOC to cover your delinquent payments and re-instate your loan. Both will stop the foreclosure and allow you enough time to pursue other options like a market sale, short sale, etc.
• Short Refi - A short refi is a refinance where your lender allows you to obtain another loan from a new lender to pay off your existing mortgage loan for an amount lower than what you originally owed. Your existing lender will accept the lower amount as payment in full.
This is a good solution if you owe more than your property is currently worth and if successful, you will end up with a lower morgage balance and lower monthly payments. In some cases, your own lender may even short-refi your loan since they will still make money over the long term from your interest payments.
Please check with a qualified attorney and an experienced accountant with regards to possible deficiency judgments or tax consequences of forgiven debt.
• Bankruptcy - If you want to start over with a blank slate, you have the ability to do so by filing bankruptcy. There are many pros and cons with regards to this as one of your foreclosure options, so consider it carefully. Bankruptcy is also a tool to stop the foreclosure and buy more time. Some people file a BK Chapter 13, and continue to pursue a loan modification, or hard money loan, or a sale, then have the BK dismissed once their loan mod is approved, or their loan or sale is about to fund and close. This way, they've avoided the foreclosure and saved their property, but will unfortunately have a bankruptcy on their record.
• Market Sale - Selling a property you can no longer afford may still be the most dignified foreclosure option. You can sell your property at full market value if there is equity left. Make sure you hire the best realtor you can find and spruce up your property for maximum sales price. Be honest with your realtor with regards to your foreclosure situation, but no one else needs to know. You don't need unnecessary lowball offers if you can help it.
• Short Sale - If your property is upside down and has no equity left, a short sale is one of your best foreclosure options. You should hire a realtor who is an expert at doing short sales to guide you with all the required paperwork and negotiations with your lender. Your lender will have to accept a lesser payoff amount of your loan as payment in full. (ex: If you owe $100,000 and you're only able to sell your house at $65,000 - the lender takes a loss of $35,000 + closing costs and fees as negotiated).
Since a short sale involves forgiveness of debt, you will have to check with an experienced attorney and accountant with regards to a potential deficiency judgment and tax consequences of the forgiven debt. This can be negotiated with the help of a skillful attorney. Laws differ from state to state so make sure you know your state's laws and procedures with regard to your situation.
• Sell to an Investor - There are many investors who research foreclosure recordings and contact homeowners to make a purchase offer. If you choose to go down this path, keep in mind that an investor has the ability to close a transaction very quickly because they often have sufficient cash, but their main goal is to profit from the transaction, so they will not be making you the highest offer. It could be a win-win situation if you negotiate well and let them know you have other options. This is one of the foreclosure options that will work if you have equity left in your property.
• Deed In Lieu of Foreclosure - If you have exhausted all your foreclosure options and just want to walk away from your property, call your lender and ask if they will accept the deed in lieu of foreclosure. This means you will be handing the keys back to your lender and agree to vacate the property at a certain date and your debt is cancelled by the lender. Have an attorney review the paperwork sent by the bank to make sure you are totally released from the debt and that the lender will not be pursuing a deficiency judgment against you if the value of the property is lower than the loan amount. As always, forgiven debt may have tax consequences so consult with an experienced accountant.
• Abandonment - This is one of your worst foreclosure options. If you have the urge to just pack up and leave at midnight, please reconsider. As much as that sounds tempting at times, it leaves too many strings attached. The lender has the right to sell your property at auction immediately, slap you with a deficiency judgment if the sales proceeds do not satisfy the loan, then report the loss to the IRS who will in turn come after you to collect taxes on the forgiven debt. It is always better to try to work things out with your lender to salvage as much as you can, and hopefully be able to truly start over with a blank slate.
• Do Nothing - This is the worst of all your foreclosure options. Unfortunately, many people are paralyzed by fear, depression, ignorance, negligence, or whatever other psychological and physical obstacles that manifest when facing a traumatic event such as foreclosure. I have seen people give up a lot of equity because they froze up and could not or would not take action to save their property. If you do not have the will to do it for yourself, do it for your family if you have one.
The sooner you take action, the more remedies you have and the more time you have to pursue the best and most viable plan. Ignoring the foreclosure will not make it go away so muster up the courage and strength to do the best you can for yourself and your family.
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