This week I had the unpleasant responsibility to explain foreclosures to three different clients.  Two were in foreclosure with their current lenders having well over $100,000.00 in equity!

They were seeking cash out refinances and didn't understand why they couldn't qualify for a new loan? They had heard about "no doc" programs and though they would qualify.  Because of their mortgage lates their fico credit scores were (very) low and the subprime mortgage market has completely lost their appetite for this type of risky financing.  No doc programs still exist but require better than average fico scores to qualify. Even when income is sufficient lenders are not required to rework defaulting loans.  One claims her lender sent back the certified checks she sent to make up the late payments!

I explained that should foreclosure take place they will loose all their equity to their lenders. Sadly many people are under the misconception that lenders will cut them a check back after foreclosure.  NOT GOING TO HAPPEN!

I feel like the police officer or priest that is left to say someone won't be coming home tonight.  Nothing I hate doing more and nobody I hate more than the loan officers that won't return their calls leaving it to guys like me to do it for them!  From now on refer them to my blog...

Filing for bankruptcy will put an automatic stay on the foreclosure process.  The two most common types of bankruptcy are ch13 & ch7.  The former requires a (partial) repayment plan. Ch7 doesn't but the court authorizes a trustee to liquidate personal assets to partially pay creditors nonetheless.   Ch13 may be the right solution if you have sufficient income to pay the mortgage going forward. Don't expect the court to let you keep the house if you can't show how you will be able to make payments that may even be larger if you have to play catch up on the mortgage.

To avoid foreclosure & bankruptcy your choices are likely hard money lenders or sell.  Hard money loans aren't cheap and they are generally uninterested unless you have over 20% equity in the property. They generally want to see 40% equity before they take a bunch of it from you. This "band-aid" solution is for those who can quickly rebuild their credit and refinance back to conventional financing. If you can't make your current payment it's unlikely you will be able to pay the rates & fees that come with these loans.

You can sell & move out or sell to a friendly 3rd party who will rent back to you if they qualify for a mortgage loan themselves. Your sales contract can include a repurchase provision agreeing to the amount and time limit you need to repurchase by. There are businesses that specialize in these sale/lease back arrangements but it's much better to use someone you know and trust wherever possible.  Don't try to sell to a friendly party and declare bankruptcy thereafter. This can be a fraudulent transfer of assets and may result in criminal charges.

Don't walk away from equity by sticking your head in the sand when you have cash flow problems.  Be proactive about assessing the likely duration of your financial shortfall and make mortgage payments on time so you can keep you options open. When you foresee troubles making mortgage payments consider cashing out while your credit is still good and use the time to honestly assess whether you need to sell or suppliment future payments until your cash flow is scheduled to improve.

Good luck and God bless & protect those I send to read this blog in the future.

 Greg Zaccagni @ http://www.mortgageadvisor.info

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