Foreclosure is a choice made by uninformed homeowners who have simply given up. No matter how frustrated you are or how grim the situation has become, foreclosure is almost never the right choice.
Below I’ll explore a number of ways to avoid foreclosure:
1) Loan Modification
A loan modification is an adjustment to the original loan terms agreed upon by the lender and the borrower. There are three areas that can be adjusted:
1 Interest rate (lowered either temporarily or for the life of the loan)
2. Length of the loan (extended to 40 years!)
3. Principal owed/Principal reduction (this is the least likely to occur)
Loan Mod Requirements
You will need to provide extensive documentation to prove why you need a modification. Your bank will go through a credit check, run an income vs.. expenses analysis, and then will do an appraisal on your home.
By most accounts, the loan modification programs, the most popular one was HAMP (Home Affordable Modification Program), many called it the “Obama plan,” have been an absolute failure. The criteria to qualify for one of these programs continues to change and most borrowers who have attempted them have been denied.
And those who were approved many times did not get approved for terms that would allow them to keep their home long term. That is why the re-default rate is over 50% within 12 months after a loan modification.
Our position on Loan Modifications has never changed: If your financial hardship is temporary and the savings from the loan modification will enable you to keep your home, then this is a viable option.
What to Watch Out For: Trial modifications that entice you into paying 3 straight payments and then once you do, they deny you for a permanent modification. But a crucial thing to watch for is when you are in a month over month holding pattern and keep getting told that your file is being reviewed the bank is moving forward with a foreclosure action!
2) Refinancing
If you are upside down, where you owe more than your home is worth, then the only chance to refinance will most likely be through the Home Affordable Modification Program (HARP). The Obama administration recently loosened the requirements to get into HARP in an effort to assist more underwater homeowners.
HARP Requirements:
- Your loan must be guaranteed (owned) by Fannie Mae or Freddie Mac and have been since prior to May 31st 2009.
- You must be current on your existing mortgage and current for the prior 6 straight months
- You can only have 1 late payment on your mortgage in the last 12 months
Contact your existing lender to see if they are participating in HARP.
HARP can be a long term solution if a homeowner can get into a lower payment they can afford. However distressed homeowners need to remember that this does not solve the fact that the home is underwater. In addition, it pushes your loan out 30 years again.
What to Watch Out for: Be on the look out for loan modification and refinance scams. Any time the media shines the light on some of these programs, scam artists try to take advantage of distressed home owners. Never pay any up front fees of any kind or any fees throughout the refinance process!
3) Forbearance
Forbearance is a special agreement between the lender and the borrower to delay a foreclosure and come to an agreement as to how missed payments (and associated fees) are to be paid back.
Is Forbearance Right for You?
Forbearance should only be used for a temporary financial hardship. If someone has a more long term hardship such as unemployment or underemployment then this is not a good option. The lender will not agree to forbearance unless the terms are favorable to them which may include a lump sum payment or tacking on any missed payment to the back end of your loan. Remember all of those payments that you don’t make get ADDED onto the end of your loan.
What to Watch Out for: Trying to obtain forbearance because you can no longer afford your home and you are upside down is a bad idea and only makes you further upside down.
4) Bankruptcy
Bankruptcy is the legal status of an insolvent person or business that cannot repay debts owed to creditors.
Is Bankruptcy Right for You?
Bankruptcy does not stop a foreclosure forever. But it will delay it and it may eliminate the responsibility for the deficiency balance on your mortgage.
Bankruptcy Requirements
Income and assets guidelines dictate if an individual or a household would qualify for it. If a foreclosure date does not allow for enough time to find another place to live, there are additional liens on the property that would prevent the home to be sold on the open market, or you are concerned that the bank will come after you for the difference, than a bankruptcy may make sense.
What to Watch Out For: Bankruptcy has the worst possible effect on your credit and should only be used when absolutely needed.
5) Deed in Lieu of Foreclosure
A deed in lieu of foreclosure occurs when a borrower conveys all interest in their property over to the lender to satisfy the loan that is in default and avoid foreclosure proceedings.
Is Deed in Lieu of Foreclosure Right for You?
A deed in lieu of foreclosure, is basically a “voluntary foreclosure,” since you are essentially handing over the property to the bank without them having to go through the actual foreclosure process. While a deed in lieu is easier than foreclosure, the only party who will reap the benefits of this program is the bank. The credit implications and impact on your ability to borrow money in the future are identical to a foreclosure. It is not looked upon favorably.
What Are The Deed in Lieu of Foreclosure Requirements?
Like many foreclosure alternatives, there is a long list of requirements that prevents many people from qualifying for a deed in lieu of foreclosure.
For example, other liens and mortgages may limit this option, and a true hardship must exist. Since the bank is not in the business of owning properties they will only consider this option if the loan is in default and they truly believe they will have to foreclose if they do not agree to it.
Lenders prefer short sales over a deed in lieu because with a short sale they don’t have to take over the property. Even under the Treasury’s HAFA program you are required to first attempt a short sale and if that fails after 120 days then you can apply for a deed in lieu of foreclosure.
What to Watch Out for: A deed in lieu does not automatically forgive the deficiency balance on the loan. Just like with a short sale you need to be sure the language in your Deed-in-lieu agreement waives any deficiency balance.
6) Short Sale
A short sale is the process of selling a home through which the lien holder(s) agrees to settle for less than they are owed.
Any unpaid balance owed to the creditors is known as the deficiency which, if negotiated effectively, is forgiven.
The main reasons our clients opt for a short sale over the other options are: debt forgiveness, credit impact, ability to purchase another home more quickly, the likelihood of a continued depressed housing market, selling with dignity, and moving in a more predictable and controllable timeframe.
We have found that many distressed homeowners will attempt some of the above methods such as loan modification, forbearance, and then leave a short sale for last. Then once the short sale is complete almost all of them wish they had done the short sale from the beginning!
Please…don’t wait until you get the “notice of foreclosure sale” served to you…give me a call now, we’ll discuss what your best option is and how to accomplish it. My direct line is 561-602-1258.
Thanks for reading, Steve Jackson
