Foreclosure Avoidance

11 Options to Avoid Foreclosure

The current housing market and financial crisis has caused devastating results for many American families. Foreclosure is one of the most devastating financial challenges that a family can face. Thankfully, it is one that many times can be avoided. There are many options available to Folsom/El Dorado Hills/Sacramento area residents to avoid foreclosure. The following is a brief explanation of these options. The first decision you must make is: Do you want to keep the home or give it up?

If you want to keep your home, the following options may apply to you:

Reinstatement

This is the simplest solution for a foreclosure, yet it is often the most difficult. The homeowner simply requests the total amount owed to the mortgage company to date and pays it in full. Lender’s approval is not required and it can ‘reinstate’ a mortgage up to the day before the final foreclosure sale.

• Positive: Does not require the mortgage company or lender’s approval.
• Negative: Requires that a homeowner pay all back payments, fines and fees in one lump sum.

Forbearance or Repayment Plan

This option involves the homeowner negotiating with their lender to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe each month.

• Positive: Allows the homeowner to make up back payments over time.
• Negative: Requires that a homeowner be in a financial position to pay not only their current mortgage payment each month, but also a portion of the back payments owed. Some lenders will require a homeowner to ‘qualify’ for forbearance.

Loan Modification/Loan Mod

This is the most commonly used option for homeowners wanting to keep their home. This option involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These changes typically result in a lower payment to the homeowner and a more affordable mortgage.

• Positive: Reduces the payment a homeowner is required to make on a monthly basis. NOTE: Principal reductions are extremely rare.
• Negative: Requires that a homeowner ‘qualify’ for the new payment and will often require full documentation from the homeowner. NOTE: The success rate of loan modifications in America has been less than 10% historically (as of 10/2011).

Refinance

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

• Positive: In some cases, this will lower payments.
• Negative: In today’s market, a refinance may raise mortgage payments, and can be an expensive process. Many people into todayís market have no equity.

Short Refi (HARP)

Homeowners with a Fannie Mae, Freddie Mac or FHA loan who are current on their loan but owe more on the loan than the home is worth may be able to re-finance to get a lower interest rate.

• Positive: Reduces the payment a homeowner is required to make on a monthly basis.
• Negative: Requires that a homeowner be current on their loan payments (and meet some other guidelines) so this will not help people who are currently in foreclosure.

Bankruptcy

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. Consult a bankruptcy attorney and speak with a real estate professional that specializes in helping distressed homeowners in order to get a complete perspective on your specific situation.

• Positive: Does not require lender approval.
• Negative: If a homeowner cannot afford their mortgage payment, a bankruptcy will only stallónot stopóthe foreclosure process. Bankruptcy can be costly, is damaging to credit scores, and can only be declared once every seven years.

Servicemembers Civil Relief Act (military personnel only)

If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Service members Civil Relief Act. The American Bar Association has a network of attorneys that will work with service members in relation to qualifying for this relief. For answers to commonly asked questions, visit portal.hud.gov/hudportal/HUD

• Positive: If qualified, this will lower payments on all consumer debt in addition to mortgage payments.
• Negative: Must be active military to qualify.

If you want to move from your home and move on with your life, here are your options:

Rent the Property

A homeowner who has a mortgage payment low enough that renting the home out will pay all or most of the house payment is able to convert their property to a rental and use the rental income to pay the mortgage. Consult with your tax professional when considering this option.

• Positive: Allows homeowner to keep property indefinitely. Owning rental property is a great way to build wealth.
• Negative: The issues that can arise with a rental property are many, including tenant issues and property condition.

Additionally, rent often does not cover the full cost of property ownership (like taxes and insurance) and maintenance

Deed in Lieu of Foreclosure

This option 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.

• Positive: Many times in a successful deed in lieu, the lender will forego their right to a deficiency judgment.
• Negative: Requires that a homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.

Sell the Property

Homeowners with sufficient equity can list their property with a qualified agent that understands the foreclosure process in their area.

• Positive: Allows homeowner to avoid foreclosure and harvest some of their equity, if any.
• Negative: In many cases today, homeowners do not have sufficient equity to sell their property without having to bring cash to the closing table.

Short Sale

If a 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 (see Short Sale FAQs). 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.

• Positive: 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. Borrower may qualify for another mortgage in as little as 24-36 months (as opposed to 5-7 years for a foreclosure).
• Negative: Short sales can be a trying process in which a homeowner is best served by contracting with a qualified real estate agent to guide the way.

This represents only a summary of some of the solutions available to homeowners facing foreclosure. Please contact us today to schedule your free Phone Consultation to discuss your specific situation, and possible options. Help is available.

Please contact us or call 916-939-2040

Smith Real Estate Services, Inc.is a real estate brokerage company in California (DRE 01381095 and 00676207). We do our best to provide you with current and accurate information. However, we are not attorneys or accountants. Please consult with your attorney or CPA for further information and how this information may affect you personally. Visit our Resources for a list of professionals who specialize in helping distressed homeowners. This was written in October 2011.