Millions of Americans have experienced the devastating effects of the current United States housing market. This is a painful reality for many who invested in real estate. Those facing foreclosure are hit the hardest with emotional stress and heartache. However, foreclosure is a financial challenge that can be avoided. The following options are available to homeowners facing foreclosure.  

  

Do Nothing

If you do nothing, you will most likely lose your home at the foreclosure auction. Doing nothing doesn’t avoid foreclosure.

ADVANTAGE:

You may relocate to another home and simply move on with your life and leaving the past behind.

DISADVANTAGE:

Loan applications generally ask if you have ever had a foreclosure, and credit reports disclose this damaging information. Foreclosure and bankruptcy have very damaging effects on credit scores.

 

Payoff/Refinance

You may pay off the entire loan amount plus the default amount, penalties, and fees. Usually this is accomplished through refinancing the debt. If you choose this option, you will want to make sure there is equity in your home or that your home qualifies for the Home Affordable Refinance Program. 

ADVANTAGE:

Allows you to take advantage of low interest rates and a lower monthly mortgage payment.

DISADVANTAGE:

You may be unable to qualify due to high debt-to-income ratios and/or derogatory items creating low credit scores.

 

Reinstatement or Cure

This is the simplest way to avoid foreclosure. You may choose to pay the entire default amount plus interest, attorney fees, late fees, taxes, missed payments, and any other potential fees.

ADVANTAGE:

Curing the loan doesn’t require lender approval and can be done in a short period of time.

DISADVANTAGE:

Typically, homeowners do not have enough money to pay a large lump sum.

 

Loan Modification

You may be able to work with the existing mortgage company to refinance the debt or extend the terms of the loan. This may allow you to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problems that caused the late payment.

ADVANTAGE:

A reduction in the interest rate will lower the payment and create a more affordable payment.

DISADVANTAGE:

Requires you to submit full documentation to the lender before the modification is approved. A loan modification doesn’t help you if you owe more than your home is worth.

 

Forbearance/Repayment Plan

The lender may be able to arrange a repayment plan based on your financial situation, which allows you to continue making mortgage payments plus additional payments to cover the delinquent amount.

ADVANTAGE:

Allows you to avoid foreclosure by making back payments over a period of time.

DISADVANTAGE:

A substantially higher mortgage payment.

 

Service Members Civil Relief Act

If you are active military personnel, you may qualify for relief if you are experiencing financial issues due to deployment. However, you must be able to show you entered into debt prior to deployment. 

ADVANTAGE:

Qualified members of the military may lower their payments on all consumer debt in addition to their mortgage.

DISADVANTAGE:

Not everyone qualifies.

 

Deed in Lieu of Foreclosure 

You may be able to give the property back to the bank instead of waiting for the bank to foreclose. Banks generally require all mortgage payments and taxes be current and the home be well maintained. Lender approval is required and you must vacate the property.

ADVANTAGE:

This is a “friendly foreclosure” and a fair agreement between you and the lender. In some cases the bank will forego their right to a deficiency judgment.

DISADVANTAGE:

Most loan applications ask if the applicant has ever completed a deed in lieu of foreclosure. You must vacate the property, and the deed in lieu may be reported as a foreclosure.

 

Rent the Home 

Converting the home to a rental property could provide rental income if the mortgage payment is low enough. Also, renting rooms may provide supplemental rental income that can help eliminate the financial hardship.

ADVANTAGE:

May help you avoid foreclosure and keep the home as an asset producing income.

DISADVANTAGE:

Renting rooms in your home may be stressful and many issues may arise as a result of being a landlord.

 

Bankruptcy

You should consult with a qualified bankruptcy attorney prior to selecting this option. This may be a solution for those with non-mortgage debt causing them to miss mortgage payments. There are several types of bankruptcy options, which are outlined in section 12 of this booklet.

ADVANTAGE:

Does not require lender approval and will immediately postpone the foreclosure process. Can help you move forward with a clean slate.

DISADVANTAGE:

A bankruptcy will only stall the foreclosure process and not eliminate it. This could be costly and very damaging to credit reports.

  

Sale

If the property has equity (money remaining after all loans, closing costs, and monetary encumbrances are paid), you may sell the home without lender approval through the home sale process. In this case, you will receive cash from the sale, which is paid at close of escrow.

ADVANTAGE:

You sell the home and walk away with equity, which allows you to avoid foreclosure.

DISADVANTAGE:

The national housing crisis has caused many homeowners to owe more on their home than what it’s worth. Their only selling option would be a short sale, which is outlined below.

 

Short Sale

If you owe more on the loan than the property’s current market value, then a short sale can be negotiated with your lender. Most short sales require the home to be listed for sale and you must be able to show a financial hardship to qualify. Short sales are outlined in section 13.  

ADVANTAGE:

A successful short sale allows you to avoid foreclosure and help maintain a higher credit score. The short sale will keep a foreclosure from being reported in public record and in many cases avoids a deficiency judgment. Borrowers may qualify for a new loan in as little as 24 months versus five years after a foreclosure.

DISADVANTAGE:

Short sales are not always a guaranteed, and some end up going to foreclosure. It can be a trying process and success may be determined by your perseverance, along with the real estate agent and their experience.