Foreclosure can be frightening. It’s certainly not a topic most homeowners want to think about. Between the threat of losing your home and the threat of other financial problems such as bankruptcy, foreclosure may sometimes seem insurmountable. But, even if you’re on the verge of foreclosure, you may still have options. Let’s take a closer look at the foreclosure process as well as its many alternatives. While we do offer some tips, remember, it is best to speak with your financial advisor.
The Process of Foreclosure
The foreclosure process is straightforward and gives homeowners several opportunities to pay back the loan and avoid losing the home. Depending on the state and lender, homeowners must miss around three to six months of payments before the lender will issue a Notice of Default (NOD). This will alert the homeowner that foreclosure is a real possibility. Once this notice has been given, the reinstatement period will begin. During this period – usually running until five days before the foreclosure is finalized – homeowners will be able to avoid foreclosure by making the loan current and paying all fees that have accrued.
If the default has not been corrected (meaning that the loan has not been made current) within three months, a foreclosure date will be announced and a Notice of Sale will be placed on the property. On that day, the home will be auctioned to the highest bidder. First, the foreclosing lender will announce an opening bid (which is usually equal to the outstanding balance and other accrued fees), but if there are no higher bids, the property will be purchased by the attorney conducting the sale for the lender. When this occurs, the property is deemed Real Estate Owned (REO). This is a common occurrence when the total amount owed to the bank or lender is worth more than the value of the property.
Solutions to Keep Your Home
- Reinstatement – You pay back all debts, including late fees and fines. You can do so up to the day before the final day of foreclosure.
- Loan modification – When you’re still able to make payments but aren’t able to make your loan current, you may be able to change the terms of your loan by negotiating with your lender. However, keep in mind that those with additional debts – such as medical bills or car payments – may not be able to qualify.
- Rent the property – If monthly mortgage payments are low enough that you can rent out the property and use rental payments to make ends meet, this may be a viable solution. However, you will still need to find a place to live in the meantime.
- Refinance – If your credit is still in good standing and you have substantial equity in your home, you may be able to refinance your current loan. However, be aware that you may not be able to qualify for refinancing if your home has recently gone down in value or if you purchased your home with no money down.
- Bankruptcy – In some states, bankruptcy will stall the foreclosure process and may allow you further opportunities to pay back your lender. If a personal bankruptcy can eliminate other debts that are getting in way of your mortgage payments, this may be a wise decision.
- Forbearance – Also known as a payment plan, a forbearance agreement allows you to pay only a portion of your payment for a specific period of time, based on your current financial situation. While this is only a temporary solution, it may give you the necessary time to find another job or make other changes.
Using a Reverse Mortgage to Prevent Foreclosure
As long as you are 62 or older and own your home, you may be eligible for a reverse mortgage. By getting a reverse mortgage, you will be able to eliminate the existing mortgage on your home which may enable you to avoid foreclosure. Just be sure to keep up to date on property taxes, homeowner’s insurance, and maintenance expenses to ensure that you don’t find yourself in a similar predicament. If you’re intent on staying in the home, getting a reverse mortgage is a viable option.
What if You Can’t Keep Your Home?
If the situation looks dire and you owe more on the home than it is actually worth, but you also don’t want to declare bankruptcy, a short sale may be the right move for you. Essentially, a short sale is a sale in which the money raised from selling the property falls short of the debts secured by liens against that property. If all lien holders agree to accept less than the amount owed on the debt, a sale can be accomplished. Hire a short sale real estate specialist who can negotiate a short sale agreement with your lender. By conducting a short sale, you will avoid the full impact of the foreclosure process and the damage it will do to your credit score.
When times get tough, a deed-in-lieu of foreclosure (also known as “friendly foreclosure”) is another alternative. Instead of facing the entire foreclosure process, you can simply return the deed to the lender (saving them thousands of dollars in foreclosure proceedings) and walk away. However, lender approval is required, and if you have more than one mortgage, this will not be an option. Keep in mind that if you are going to try to cooperate with your lender and be proactive, a short sale is usually preferred.