Foreclosures are devastating to the individuals experiencing them. They cause financial and emotional hardship on the homeowners as well their family. There are solutions and other options than a foreclosure. Here are a few options worth exploring:
Reinstatement – is the simplest solution for avoiding a foreclosure; however it is also one of the most difficult solutions. The homeowner requests the total amount owed to the mortgage company to date and pays the sum. This solution does not require lender approval and it will ‘reinstate’ a mortgage up to the day before the final foreclosure sale.
- Benefit: does not require the mortgage company or lender’s approval
- Drawback: requires homeowner be able to pay all back payments, fines & fees.
Forbearance or Repayment Plan - involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. They homeowner typically makes their current mortgage payment in addition to a portion of the back payments owed.
- Benefit: allows homeowner to make back payments over time
- Drawback: requires that a homeowner be financially able to pay not only their current mortgage but also a portion of the back payments owed.
- Drawback: homeowner will usually be required to ‘qualify’ for the forbearance
Mortgage Modification - involves the reduction of either the interest rate on the loan, the principal balance of the loan, the term of the loan or any combination of these. The result is a lower payment and a more affordable mortgage.
- Benefit: reduces the monthly payment a homeowner is required to make
- Drawback: homeowner must qualify for the new payment and may require full documentation
- Drawback: if homeowner has a second mortgage – may need to subrogate the second mortgage which may involve additional fees and requirements
Renting the Property – is an option of the homeowner has a mortgage payment low enough that the market rent will cover the mortgage, taxes, & insurances.
- Benefit: allows homeowner to keep property
- Benefit: allows for someone else to pay the mortgage(s)
- Drawback: issues can arise with rental property from needed repairs, tenants stop paying rent
- Drawback: rent doesn’t always cover the full expense of the property including maintenance and repairs.
- Drawback: rent will need to be claimed as rental income (talk to your accountant and/or tax attorney)
- Drawback: often the property taxes will increase as the homeowner is no longer occupying the property and may no longer be eligible for homestead exemption.
Deed in Lieu of Foreclosure – often referred to as the ‘friendly foreclosure’, a deed in lieu of foreclosure allows the homeowner to return the property to the lender rather than go through the full foreclosure process (including legal fees, evictions, etc). The lender MUST approve this option and the homeowner must vacate the property.
- Benefits: in some instances a lender will forego their right to a deficiency judgement
- Drawback: a foreclosure by any name is still a foreclosure. More than likely a deed in lieu of will still be reported to the credit bureaus as a foreclosure with the same impact on your credit.
- Drawback: a foreclosure by any name is still a foreclosure. When you are ready to purchase a home in the future – you may still have to disclose to the lender you had a home that was foreclosed on.
- Drawback: a foreclosure by any name is still a foreclosure. Depending on your employment situation – a foreclosure could impact your employment (many government, security and financing positions do not allow employees to have foreclosures on their credit report
Bankruptcy –considered by many as a ‘foreclosure solution’. 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. Contact your attorney and your accountant regarding if this is a worthwhile expense and solution for your situation.
- Benefits: does not require lender approval
- Drawback: if homeowner cannot afford their mortgage payment – a bankruptcy will only stall the foreclosure process
- Drawback: can be costly
- Drawback: damaging to credit scores, usually follows homeowner around for 7 years & may impact future mortgages
Refinance - is a viable option if the homeowner has sufficient equity in their property, their credit is still in good standing and they have not been late on their mortgage.
- Benefit: in many cases, a lower monthly payment
- Drawback: closing costs will add to the cost of the process
- Drawback: will need to qualify and have good credit
- Drawback: property must appraise which can be very challenging in the current market. Many homeowners who have negative equity will not be eligible.
If you want to stay in your home, have good credit with no late or missed payments, you may be able to contact your lender directly and see if you can refinance your loan. Some lenders now have programs to help homeowners take advantage of the lower interest rates even if they are in a negative equity situation.
Service Members Civil Relief Act – available to military personnel only. If a member of the military is experiencing financial distress due to deployment and that person can show proof that the debt was entered into prior to deployment, they may quality for relief under the Service Members Civil Relief Act. Contact your local Bar Association to find an attorney who will work with Service Members to qualify for this relief.
- Benefit: if qualify for this program, will lower payments on consumer debt and mortgage payments.
- Drawback: limited qualifications – must be active military to qualify.
Sell Property – Equity Sale – homeowners who can sell their property for the current market value and the sale is sufficient to cover all mortgage(s) obligations.
- Benefit: allows homeowner to keep their credit score from being damaged.
- Benefit: avoid a foreclosure and may even have some equity after sale expenses.
- Drawback: many homeowners do not have sufficient equity to sell their property without negotiating a short sale.
Short Sale– when a homeowner owes more on their property than it is currently worth, a homeowner can hire a qualified short sale real estate agent to market and sell their property through the negotiation of short sale with their lender(s). Property must be actively listed on the market and homeowner must have a hardship to qualify. Acceptable hardships include: mortgage payment increase, job loss, divorce, excessive debt, forced or an unplanned relocation, medical bills, prolonged illness, etc.
- Benefit: avoid foreclosure & avoid having on your public record
- Benefit: usually less damaging to credit rating
- Benefit: may qualify for another mortgage sooner than if foreclosure
- Benefit: most lenders will pay for the real estate commissions
- Benefit: property is sold in ‘as-is’ condition – no repair negotiations
- Drawback: can be a trying process with working and waiting for lender(s) responses
- Drawback: homeowner must be prepared to provide updated financial/bank statements on an ongoing basis
This represents only some of the solutions available to homeowners facing foreclosure or trouble paying their mortgage. Please contact us today for a free and confidential evaluation of your individual situation, your property value and your options.