No one who buys a home intends to miss any mortgage payments. But unexpected life circumstances can quickly stymie the best of intentions, and homeowners can't always prevent defaulting on their payments.
If you're one of these homeowners, it's important that you take steps to prevent the situation from getting worse. Many homeowners fall into the traps of procrastination or overreaction, neither of which is helpful. Instead, you should adopt a measured response in which you take into consideration all the options available and act decisively before you lose your home. Below are some suggestions.
Contact your lender
Once the due date for your mortgage payment has come and gone, it's only a matter of time before your lender knows you're in default. But don't wait for them to contact you; act preemptively and call them right away. If you leave it up to them, they may contact you for several months - when it will be much harder to resolve the situation.
Lenders deal with defaulted customers every day, so they often can provide advice. And most lenders aren't eager to expend the money and time it takes to foreclose on your home, so they're open to other alternatives.
Consider your alternatives
Homeowners in default have several viable options to stop the foreclosure process. Not all of these options will work for every homeowner, but you should consider the advantages and disadvantages of each option and determine which is best for you if you are in default.
OPTION 1: Pay down/Sell
This is an option if you have money to spare. We can sell your home and you pay the difference between what your house sells for and what you owe your lender. The positive to this is you can keep your credit intact. The negative is that you need disposable dollars to do this.
OPTION 2: Short Sale
A short sale is where we will sell your home for less than what you owe. We need to negotiate with your lender(s) to accept less than what you owe. It will make a difference if your loan is a purchase money (non-recourse) or non-purchase money (recourse). Note: There can be tax ramifications depending on if you have a recourse or non-recourse loan. We can explain the difference if you give us a call. The positive is that you can pay off your loan(s) without any money out of your pocket. The negative depends on how many payments you missed. It can reduce your credit score 50-150 points. *
OPTION 3: Walk-away/Foreclosure
This is a situation where you just walk away from your house. You can still have negative tax consequences and it can affect your credit by approximately 250 points. In most cases, a short sale is a better option. *
OPTION 4: Bankruptcy
Sometimes you will be advised to file bankruptcy. In a lot of cases, people will suggest this because they do not know about other options as mentioned above. This should be a last resort. It can affect your credit by approximately 400 points and your credit for the long-term. *
OPTION 5: Deed in Lieu of
This is a situation where you basically hand the keys over to your lender. In most cases, the last thing your lender wants is the property back, and if they do, it is normally prior to foreclosure. At this point, your credit is probably already negatively affected. If you were current with your payments, why would your lender take the property back?
OPTION 6: Loan Modification with your Lender
This is a situation where you want to stay in your property, but can't afford your current payment(s). The lender might renegotiate interest rates or reduce your payment and add it on to the backend of your loan.
OPTION 7: Rent
You can rent your property out until the market turns upwards. In most cases, there will be a negative between the rent and your loan payment(s). Most of the experts feel this market will take 2-4 years to turn-around. You should be prepared to rent out your property a couple of years.
*(Reductions to credit scores are estimates only. Individual situations will produce varying results).
In almost any circumstance you are going to want to consult a knowledgeable and experienced Realtor in your area. It is especially important to ask a Realtor with Short Sale experience and know how for guidance. Short Sales are the most typical option homeowners take when they fall behind on their payments. The important thing is to act quickly. Lenders are becoming better and better at approving short sales and also expediting the process. Short Sales are going to be a major factor in the Sacramento market for years to come. It is much better to give a short sale a try then just do nothing and wait to be foreclosed on. Take action today and call a local Realtor that is qualified to help.
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