The good news is you have options. Foreclosure is one of the most devastating financial challenges that a family can face and one that can often be avoided. There are several alternatives to foreclosure.
A reinstatement is the simplest solution for a foreclosure, however it is often the most difficult. All the homeowner does is pay the mortgage company what is owed. This solution does not require the lender’s approval and has the ability to ‘reinstate’ a mortgage up until the day before the final foreclosure sale.
- Benefit: Does not require the mortgage company or lender’s approval.
- Drawback: Requires that the homeowner be able to pay all back payments, fines, and fees.
Forbearance or Repayment Plan
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay delinquent payments over time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe.
- Benefit: Allows the homeowner to make back payments over time.
- Drawback: Requires that the homeowner be in a financial position to pay their current mortgage, and a portion of the back payments owed. Some mortgage companies will require a homeowner to ‘qualify’ for forbearance.
A mortgage modification involves the reduction of one or more of the following: the interest rate on the loan, the principal balance of the loan, or the term of the loan. These typically result in a lower payment to the homeowner and a more affordable mortgage.
- Benefit: Reduces the monthly payment the homeowner is required to make, and may reduce the principal balance of the loan
- Drawback: Requires that the homeowner ‘qualify’ for the new payment, and will often require full documentation. Lender has to be actively pursuing modifications. The mortgage company will usually require all of the back payments and fees to be added
Rent the Property
If the homeowner’s mortgage payment is low enough, the property can be rented, and the rental income used to pay the mortgage.
- Benefit: Allows the homeowner to keep the property indefinitely.
- Drawback: The rent often does not cover the full cost of property ownership and maintenance.
Deed in Lieu of Foreclosure
Also known as a ‘friendly foreclosure’, a deed in lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property.
- Benefit: The lender may forego their right to a deficiency judgment.
- Drawback: Requires that the homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.
Many have considered and marketed bankruptcy as a ‘foreclosure solution,’ but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.
- Benefit: Does not require lender approval.
- Drawback: This will only stall the foreclosure process, it will not stop it from happening. It is damaging to credit scores. And can only be declared once every seven years.
If the homeowner has sufficient equity in their property and their credit is still in good standing, they may be able to refinance their mortgage.
- Benefit: It can lower payments.
- Drawback: In today’s market, a refinance will almost always raise mortgage payments, and is an expensive process.
If the homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more.
- Benefit: A short sale allows the homeowner to avoid foreclosure and salvage some of their credit rating. This also keeps foreclosure off the individual’s public record, and in many cases will allow the homeowner to avoid a deficiency judgment. The borrower may qualify for another mortgage in as little as 24 months (as opposed to five years for a foreclosure).
- Drawback: Short sales can be a trying process in which the homeowner is best served by contracting with a qualified real estate agent to guide the way.
|This is only a summary of some of the solutions available to homeowners facing foreclosure. Contact us today for a FREE confidential consultation of your individual situation and personalized options.|