Alternatives to Foreclosure
By Nikki Vaughn
First and foremost its vital that you communicate regularly with
your lender and understand all of your options. Whether you're about
to have your house sold at auction, foreclosure is in sight, or
you've missed your first payment or possibly second payment, you
may still have a good chance of saving your home and avoid the foreclosure
nightmare. Also, if you are current and in good standing today with
your monthly payments but recognize the coming months may get financially
too tight, then be prepared and act now! Let's review a handful
of options, highlighting the positives and possible negatives of
each process. Which avenue is best for you during your hardship?
- Loan Modification: This method of getting back
on track with your home loan is most often the best route when the
hardship you're facing is temporary. There should be no damage to
your credit history and you can stay in your home happily. Some
solutions include minor adjustments by deferring your past due
amount to the end of the loan or reducing the payment for the next
few months/lowering your interest rate. A loan modification occurs
where all parties involved with a problem loan mutually agree to
create a new and better loan. The loan modification should concur
previous financial issues, ensuring new obligations are met seamlessly.
However, modifying your home loan is not as easy as it sounds, especially
attempting to mange it on your own. Contacting, communicating and
working with the proper individuals within your Lender's organization
can be frustrating and simply inefficient. I suggest working with
a seasoned professional to help expedite the process. Your best
bet is to retain a professional, experienced mortgage attorney and/or
legitimate, credible law firm experienced with a history of loan
modification successes. Banks do not want to foreclose on your property.
They would rather continue collecting your money than take over
your property, especially with the current high volume of foreclosures
However, if your credit is severely damaged your lender may not
approve the modification in fear that the new proposed terms will
not be met successfully. Monthly payments may still be a bit high
as you are keeping your entire mortgage balance plus the total default
- Refinance: If your hardship is due to your current
tight financial situation amplified by your adjustable rate mortgage
that's inflating your monthly payments, you may still be able to
refinance into a fixed-rate loan. However, if you are already late
on payments and your credit history has gone down hill, this option
may be unavailable. Work with a trusted source or loss mitigation
specialist to review and dictate your possibilities. They should
be able to give you a clear answer as to whether this is possible
without charging you any fees. There are of course normal charges
and fees if you pursue and successfully refinance and your credit
will stay intact.
Keep in mind, refinancing is most likely not available if your credit
is already severely damaged. There must be a certain percentage
of equity (the amount you owe on the loan is less than what the
property is worth and the positive difference is your equity) and
the monthly payments may still be somewhat high.
- Home Sale: If the amount you owe on your property
is less than or equal to the current market value of the property,
selling your home may be a good option because you will be able
to pay off the mortgage in one lump sum. But in today's real estate
market this option is rarely the case. As you probably know, home
prices have decreased nationwide, the job market has pinched people
out of work and new prosperous jobs are tough to come by. Most people
in mortgage trouble today are faced with the problem of owing more
on their property than it's worth. If you are in a position to sell
your home and pay off the mortgage in full, then you do not need
a loss mitigator and should contact your local, trusted Realtor.
- Short Refinance: A Short Refinance, also known
as a short payoff, is a transaction where the lender agrees to accept
less than the full amount owed on the entire mortgage. Instead of
the property being sold, it is refinanced with a new bank or lender.
The short refinance allows the homeowner to retain ownership of
the property, while at the same time avoiding a foreclosure or possible
bankruptcy. If you want to keep your home, but don't have enough
equity to get into a foreclosure bailout loan, a short refinance
is your answer. By negotiating a short refinance with your current
lender, you can obtain a payoff of less than the full amount owed,
and refinance your home with a new lender. At this lower payoff
amount, you are then able to have a mortgage you can afford. This
option may not be available to you if you are severely past due
on your mortgage or have severely damaged credit.
Again, with a successful short refinance the entire debt is wiped
away and the backs will not and can not go after you for the difference.
I suggest working with a loss mitigation company who will manage
and negotiate on your behalf. You should have no out-of-pocket expense
because they will work all fees into your new loan. There should
be minimal damage to your credit.
- Short Sale: Are you behind on your mortgage,
or unable to work with and negotiate new terms with your current
lender, or concerned about your home foreclosing and therefore damaging
your credit? If you fall into any of the above categories then the
short sale option may be the best avenue for you. In such an event
the lender agrees to forgive the financial portion of the mortgage
payoff that is not covered by the sale price. In return, the borrower
does all the legwork associated with the listing and selling of
the real estate. Here is an example of the short sale process:
- You owe $350,000 on your home and are unable to make your minimum
monthly payment, and your financial situation in the coming months
doesn't look to get any better.
- You've fallen behind on your monthly mortgage payment and are
entering into the pre-foreclosure period.
- At this point FIND AN EXPERIENCED REAL ESTATE AGENT WHO HAS DONE
A SHORT SALE BEFORE and has a successful track record. Your real
estate agent will be able to deal and negotiate with the mortgage
company on your behalf. An experienced short sale agent will give
you a much better chance of successfully short selling your home.
- The property can then be listed with stipulation that the sale
is pending third party approval.
- Interested buyers make offers that are submitted to you and your
agent. If agreeable, offers are sent to the bank for approval. In
this scenario, an offer may come in at $300,000. You submit this
offer to your lender, requesting forgiveness of the outstanding
If successful, the banks will report this on your credit history
as 'Settled For Less Than Owed.' This is a negative mark on your
credit score but is nothing close to a bankruptcy or foreclosure.
- Deed in Lieu of Foreclosure: This is the last
resort when faced with a possible foreclosure. It means simply giving
away the deed to the bank in exchange for them not pursuing a foreclosure
action against you. This does significant damage to your credit
score, but is still better than a full foreclosure. You will avoid
"foreclosure" on your credit and the bank will not pursue you for
the outstanding balance on the loan. This option is only available
if the house has been on the market for 6 months with no buyer and
if the foreclosure sale date hasn't been set yet.
- Bankruptcy: This is the final alternative to
foreclosure. This can be a costly process and tough to successfully
accomplish since your hardship already has you in a financial bind.
There are two basic options available to consumers under the bankruptcy
laws: chapter 7 and chapter 13.
The major benefit of a chapter 7 is to get rid of unsecured debt
such as credit cards and medical bills. You will be allowed to keep
certain kinds of property under the exemptions allowed by federal
and/or state laws. The definition of "exempt property" differs in
each state and usually includes your home, car, clothing, furniture,
household appliances, and tools of your trade -- each to a certain
While a chapter 7 bankruptcy is appropriate under the right circumstances,
its use is limited in comparison to a chapter 13. A chapter 13 can
be used to protect "unexempt property." In a chapter 13, you pay
a portion of your monthly income to a trustee for distribution to
your creditors. A repayment plan is useful when you are behind on
your home mortgage payments, taxes, or a car loan. A chapter 13
may be in effect from three to five years. It normally allows you
to pay less than you owe. The extended payment period allows you
to make smaller payments. You will be allowed to keep part of your
monthly income to pay for living expenses like food, clothing, rent/mortgage,
To qualify for a chapter 13 repayment plan, you must have regular
income, and your unsecured debts must not exceed $250,000. If your
unsecured debts exceed $250,000, you may be able to qualify for
a repayment plan under chapter 11. Proceedings under chapter 11
are much more complicated and expensive (but not more powerful)
than those available under chapter 13.
About the Author: Nikki Vaughn is a seasoned professional
concentrating her studies and education within the personal finance
and mortgage verticals. Paying close attention to consumer driven
products and personal/national issues, she's driven to alert and
educate by delivering industry news and hot topics to her fan base.
She currently writes for http://www.consumerdebtadvocate.net
on consumer education pieces and freelance for client's websites.
Permanent Link: http://www.isnare.com/?aid=300097&ca=Finances
Published - January 2010