Foreclosure

FORECLOSURE

Foreclosure is one of the most devasting financial challenges that a family can face, but it is one that can be avoided.  There are options available.   Below are some solutions along with a brief explanation, benefits, and drawbacks:

1.      Reinstatement

The simplest solutions to a foreclosure but can be difficult: This is the process of restoring your mortgage after defaulting on your loan by paying the total amount that is past due including any fees.

• Benefit: Does not require the mortgage company or the lender to approve.

• Drawback: Requires a homeowner to be able to pay all back payments including fines and fees.

2.      Forbearance or Repayment Plan

The homeowner negotiates with the mortgage company allowing them to repay back payments over a period of time.  Typically, the homeowner will pay the current payment and any additional portion of their back payments.

• Benefit: Allows homeowner to make back payments.

• Drawback: Homeowner has to be in a financial position to pay current and back payments and may have to qualify for forbearance.

3.      Mortgage Modification

A mortgage modification is the reduction of either one of the following:  the interest rate on the current loan, the current principal balance, the current term of the loan, or even a combination of these. The result is typically a lower more affordable payment.

• Benefit: The payment is reduced and may reduce the principal.

• Drawback: The homeowner must qualify for new payment and may have to provide full documentation.

4.      Rent the Property

If a homeowner has a low mortgage that the current market rent will allow the mortgage to be paid, homeowner is able to convert property into a rental.  Use the income to pay mortgage.

• Benefit: Homeowner can keep property indefinitely.

• Drawback: There are issues that can come from owning a rental and often the rent does not cover the full cost of the property and maintenance.

5.      Deed in Lieu of Foreclosure

This is known as a “friendly foreclosure”.  A deed in lieu is an arrangement where you voluntarily return ownership of the property to the lender to avoid the foreclosure process. The lender must approve this option and the homeowner must vacate the property.

• Benefit:  If a deed in lieu is successful, many times the lender will release their right to a deficiency judgement.

• Drawback:  The homeowner is required to vacate the property and the deed in lieu may be reported to credit bureaus as a foreclosure.

6.      Bankruptcy

Many homeowners consider bankruptcy as a solution to foreclosure, but this may not always be an option.  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 option.

• Benefit:  Does not require lender approval.

• Drawback:  If a homeowner cannot afford the mortgage payment, bankruptcy will only stall the process, not stop the foreclosure.  Bankruptcy can be costly, does damage to credit scores and can only be declared one time between two - eight years depending on the type of bankruptcy.

7.      Refinance

If a homeowner has sufficient equity in the property and their credit scores are still in good standing, they may be able to refinance the mortgage.

• Benefit:  This will lower mortgage payments in some cases.

• Drawbacks:  In today’s market, a refinance will most likely raise mortgage payments and can be expensive.

8.      Sell the Property

Homeowners with sufficient equity can list their home for sale with a qualified Realtor® that understands the foreclosure process in the area.

• Benefit:  Allows homeowners to avoid foreclosure and keep some of the equity.

• Drawback:  In some cases, homeowners do not have sufficient equity to sell without negotiating a short sale.

9.      Short Sale

If a homeowner owes more on their property than it is worth in today’s market, they can hire a qualified Realtor® to list and sell the property through as a Short Sale.  The property must be on the market and the homeowners must have a financial hardship in order to qualify for a short sale.  A hardship can be a change in financial stability for the homeowner between the date the property was purchased and the date of the short sale negotiations.  Some acceptable hardships include a job loss, excessive debt, divorce, mortgage payment increase, forced or unplanned relocation and more

• Benefit:  A short sale will allow homeowners to avoid foreclosure and save some of their credit rating.  It also keeps foreclosure off the individuals’ public records and may allow the homeowner to avoid a deficiency judgement.  Borrowers may be able to qualify for another mortgage in as little as 24 months (instead of 5 years for a foreclosure)

• Drawback: Short sales can be a difficult process but contracting with a qualified Realtor® can help to guide homeowners through the process.

10.  Servicemembers Civil Relief Act (Military Personnel Only)

If a member of the military is experiencing financial distress due to deployment and can show their debt was entered into prior to deployment, they may qualify for relief under the Servicemembers Relief Act.  The America Bar Association has a network of attorneys that work with Service members to qualify for this relief.

• Benefit:  This will lower payments on all consumer debt in addition to mortgage payments if the individual qualifies.

• Drawback:  Must be active in the military to qualify.