Foreclosures are a homeowner’s worst nightmare, for you and your family. The uncertainty of how to navigate it or even the possibility of stopping it can make a grown man cry. In a recent study conducted by the FDIC, it was found that around 1 in every 200 homes get foreclosed on. The Mortgages Bankers Association reported that 250,000 families enter foreclosure every three months. But there’s some good news. You’re here and you have options. There are many other homeowners that faced foreclosure but were able to turn it around and hopefully you can too with one or more of these approaches.
Here are 6 options to help avoid foreclosure in the United States:
- Repayment plan
- Loan Modification
- New Private/Personal Loan
- Real Estate Listing/Short Sale
One of the most important things you can do to help prevent a final foreclosure is staying organized. It can be hard to keep all your paperwork, contacts, and relevant information ready and organized while you’re stressed about your living situation, but by staying organized you can stay one step ahead. You should also tackle the issue head on. It can be easy to let your payments slip and believe that everything will be ok without taking any action. Unfortunately, it won’t. Not without making phone calls, getting into contact with the right people and working it out. The other best tool you can have in your kit is understanding the foreclosure process. Not only will this help you understand your options and the best fit for your situation, it will also help you sleep at night.
What is Foreclosure?
First things first. What is foreclosure? According to Investopedia:
“Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.”
In simpler terms, a foreclosure is the bank attempting to get the house on your mortgage back because there’s been an issue with paying them. There are lots of reasons why someone faces foreclosure, but the core issue is always the same. There’re payments that are owed to lenders or tax collectors that aren’t paid. It could be from losing your job, some bad financial decisions, unexpected medical bills, or just an unexpected expense.
Foreclosure isn’t as uncommon as many people think. You’re not alone despite how isolating the experience and issue can make you feel. Remember to keep your head up and that by taking action you can still prevent it!
You’ve just missed last month’s payment and are about to miss this month. But you just got another high paying job and financially you’ve recovered. This is your absolute best-case scenario. In situations like these, a bank or lender is going to happily work with you to repay quickly and get back on track.
The most common plan of repayment is to double your monthly payments over the next two months (if you’ve missed two payments so far). This still requires talking to your lender and making sure they’re not also adding on late fees or other charges as well.
If you’re underwater on your mortgage, this is your second-best option on this list. Being underwater means that your total principle on your mortgage is more than your home’s current market value. Why is this your second-best option? Because a loan modification is a good long-term solution that lowers your monthly payments, but extends the time frame of the mortgage. The bank or lender will also roll up your missed payments into the end payment due on the mortgage which frees you from your current financial pressure.
The downside is that loan modifications are a lengthy process that require lots of personal documentation to prove not only your current situation but your new normal and how you are able to keep paying your monthly mortgage bill. However, the pain of putting together your application is worth the relief you’ll get after approval.
There’re also some restrictions on whether you can apply for a loan modification. If it’s your primary residence (not a rental property), you can show your hardship (having to take a lower paying job, divorce proceedings, loss of job, etc) and you can show that you have the ability to pay your new monthly totals. Assuming all three of those is true, all you need to do it get approved. However, getting approved isn’t easy. This is one of the reasons why it’s best to start early, the better situation you currently are in, the better chances you have of getting approved.
Private or Personal Loan
Mortgages offer low interest rates on large sums of money. It can be a hard thing to go after a high interest rate loan in order to cover missed payments. However, this is still better than moving forward with a foreclosure. There are many secondary lenders out there that are willing to take more risk on their repayment for a higher interest rate. Another option is to borrow from family to catch up the missed payments.
You need to be careful though when taking on more debt. Not only will you have to consider the additional monthly fee, but it will also be harder to apply for a loan modification or other financial adjustments with a higher debt load.
If you have equity in your home (your mortgage is less than the value of your home) then you have a couple of other options in order to not get into foreclosure. One common answer is refinancing. Refinancing means paying off your total mortgage and getting a new mortgage. This allows you to take out a high loan amount on your second mortgage in order to cover your missed payments. Depending upon what interest rates are, and your current credit worthiness, you could even wind up with a lower payment as well or just increasing the length on your mortgage but with the same terms!
Deed-in-lieu of foreclosure is a bit more complicated to understand but a very easy process. Some banks in order to settle a foreclosure without going to immediate auction allow the owner to surrender their home without contest. The big question is if the bank will require you to cover the deficiency or the difference between your home’s value and what’s left on the mortgage. However this is one of the options where you’re walking away from owning your home and will have to move out. This option is highly dependent on the laws in your state and local area. It’s also very dependent on your bank’s rules regarding this practice.
Real Estate Listing/Short Sale
Many banks don’t want to foreclose on your home. It’s a painful process that involves a lot of work on your bank or lender’s end. They don’t want that, and you don’t want to take a hit to your credit score that will take years to overcome. Running an auction for your home isn’t easy and everyone wants to avoid it. That is why short sales exist. Beneficial to lenders and homeowners (and future homeowners). A short sale is when a homeowner is allowed to sell their house for less than the mortgaged amount and the bank agrees to forgive the rest of the mortgage owed. This means the bank gets a cooperative home seller that will make the property look nice and leave when someone comes to look at the house to buy in. In turn you get your missed payments forgiven.
Before starting this process, you’ll need to communicate with your bank or lender. They need to agree that this is the right approach for them as well as you. The largest determining factor is how underwater your home currently is. The closer you are to breaking even the more likely a bank is to work with you on a short sale.
Declaring bankruptcy stops all foreclosure actions. While this might sound like a good thing, bankruptcy itself isn’t great. Aside from your credit score taking a very large hit, you’re surrendering all your assets and finances over to the legal system in order to figure it out and put you in a better situation. This should really be a last-ditch option in situations where there is no other way out.
There’s lots of things to consider when making a decision on how to resolve your impending or current financial issues. If you’re underwater or have equity in your home. If you’re prepared to move and leave your house behind. If your financial situation is getting better but just went through a hiccup. Everyone’s situation is different, but everyone is worried about their future. We hope that these options help you sleep a little better at night.
Still wondering what option you should choose? Our company strives to provide fast solutions for homeowners in need or experiencing financial hardship. Let us help put your mind at ease and make your situation more comfortable. Contact us to discuss options for your property!