When facing foreclosure, it's important to know what options are available to you as a homeowner. Normally, the clients that I deal with aren't in a state of mind that is conducive with making a rational decision very easily. All of them are stressed out, that should go without saying. This has been weighing heavily on their minds for the last several months. Not to mention, the stress from the foreclosure action is normally compounded by whatever got them into the situation in the first place. Admittedly, some people just got greedy, and borrowed more than they knew they were going to be able to pay back after any adjustments. For others, life happened. Maybe a spouse passed, or they're currently going through a divorce, or a child got sick and now the medical bills are overwhelming, or one income was cut due to a job loss. There are many, many reasons for why, but in the end, they all conjur the same emotions. People are left feeling ashamed, embarrased, and many times, helpless. If a foreclosure does hit your credit report, you can count on your score dropping by approximitely 250 points!! So what CAN you do as a homeowner to avoid a foreclosure?
Repayment Plan - You may be able to work with your lender to come up with some sort of repayment plan. Remember, this will increase your payments. Not only are you responsible for maintaining the payment as originally agreed upon, but now there are several months of unpaid bills (arrears) that need to be caught up. For example: Your payment used to be $1000/month. Let's say you've missed 3 payments. (Banks are somewhat flexible in the timing of the repayment, but it's usually about 6 months.) Using 6 months as a guide, you now need to pay $1500/month, on time, for 6 straight months. This usually only works if the problem that got you in trouble in the first place is FIXED. Meaning, you and your spouse worked things out, or the company that let you go now has a new position availble for you.
Forbearance - This process suspends or reduces payments...temporarily. If you have good communication with your lender, and can prove that your current hardship is only temporary, sometimes they will work out a solution for you. The late payments are not forgiven though. The arrears are going to be factored back into the loan, usually at the end. Meaning, instead of paying off your loan 06/20xx, your last payment will be due 09/20xx.
Loan Modification - It is possible for the lender to restructure your loan for you. Through this process, the actual terms of the loan are changed.
Partial Claim - For FHA loans only. In some cases, HUD will loan the borrower $3K-$4K for arrears. This loan is attached to the property as a lien.
Deed in Lieu - This is commonly known as a voluntary foreclosure. Basically, the homeowner gives the keys back to the bank and surrenders the property to them. This will still show up on your credit report as a foreclosure, and is it possible for the PMI insurer to file a deficiency judgement.
Loan Assumption - With mortgage rates dipping into the 4's a few years back, many lenders removed this clause from their loans. They knew rates couldn't stay that low for very long, and if someone wanted to try to assume the payments on a loan, the bank was better off to have them apply for a new loan...with a higher interest rate. That being said, there are still some loans out there that are assumable.
Bankruptcy - If a Chapter 13 is filed, you may include your house, and no action will be taken for up to 5 years. Please be aware that on average, only 3% of Chapter 13 filings are successfully completed, and often the foreclosure proceedings will resume after the BK is discharged.
Short Sale - This has become the most viable option for many homeowners who find themselves behind on their mortgage. Mentally, the owner needs to prepare themselves to leave the home. Please see my earlier post 'What is a Short Sale?'
I'm still researching whether or not you're allowed to 'buy back', or 'lease back' your home from an investor. Any insights to this matter would be greatly appreciated as I've ready many contradictory articles.
Please see www.NickDailey.com for more information on the home buying/selling process.