Foreclosure Options

If you are close to falling behind on your mortgage, or if you are already delinquent, you need to be aware of what you will be faced with and what alternatives you have. The quicker you plan and take action, the more options you will have available to you. When it comes down to it, you basically have two choices. Work to stay in house or move on. Whichever you decide, there are some things you will need to consider to make things as simple and least detrimental as possible.

Saving your home

Establish a spending plan

If you haven't already, the first thing you need to do is set up a spending plan (or budget). Having a spending plan in place is always a good idea, whether you are in trouble or not. If you are not able to meet your financial commitments, it is even more important for you to figure out where your money is going and how to re-allocate expenses in order to make your bills. Next to food, your home should be at the top of your list. Your mortgage payment should be a fixed expense, meaning it should be the same amount every month. Pay your mortgage before anything else; have it automatically deducted if necessary. Then formulate a spending a plan with the income left over after the mortgage has been paid.

There may not be enough left over to cover all of your other bills. You may need to pay only minimums, or even less, on other accounts for the time being. Something has got to give and your credit is going to most likely suffer no matter what. But, don't make things even worse by losing your home on top of everything else. Until your income surpasses your outflow, you'll probably have to cut back drastically in many areas. But, how much does saving your home mean to you?

Refinance

If you have equity in your home and have a decent credit rating, you may be able to negotiate lower payments through refinancing. Again, this is something that would have to be considered before any default occurs. Once you start missing payments, your options are drastically reduced and refinancing may not even be an option.

Do your homework and be careful about what type of loan you would be getting. There are many loans that offer very low payments initially, such as adjustable-rate, interest-only or 'option" mortgages, only to skyrocket later. The lower payments are very appealing but unless and until you create ways of making your income exceed your outflow, you will find yourself in the same situation you are in now when payments jump. You would just be delaying the inevitable.

If you are absolutely certain that your troubled financial situation is only temporary and that it will improve in the near future, perhaps you could go with one of the lower payment loans. Just be careful and use the lower payments as an opportunity to get ahead, alleviate your debt and put something away not as a cushion to become lax and careless with your spending.

Loan modification

Different than refinancing, loan modification is when a lender modifies your current mortgage in order to accommodate your financial hardship by making your house payment more affordable. Loan modification usually comes in the form of a fixed rate reduction for a certain amount of time.

If you want to attempt loan modification, you will need to organize some paperwork first. The lender typically will ask you to provide the details of your current financial situation, an expense report (or budget), third-party proof of your hardship – such as a layoff notice from your employer or doctors letter explaining how your illness or disability is interfering with your income, and a "hard-ship" letter that details the circumstances on how you fell behind and how you plan to alleviate the problem. Some lenders may also require you to provide a market analysis to see how much your home is worth.

Most lenders won't even consider modification until you are at least 3 months delinquent on payments.

Leaving your home

If the above options have failed you will have to face the possibility of leaving the home. Again, your options will be limited the longer you have had troubles and the further behind you are.

Sell

Obviously this is the best cast scenario. You would be preventing any further damage to your credit rating and may even be able to make some money in the process. But now is not the time to be greedy, or expect to get what you think is fair. The idea is to get out from under the burden of your mortgage before any further damage can be done. The equity from the sale should be enough to pay off the mortgage in full and cover any real estate and legal fees. If there is anything left over, great, apply it to your other bills that you have likely fallen behind on or save it for a down payment on your future home, should you decide to purchase again when you are in better shape.

Deed in lieu of foreclosure

This is where you offer to hand over the deed to your home and your lender agrees to release you from your mortgage. This would be a good option if you can't sell the house for what you owe, but you are not too far in over your head. A deed in lieu of foreclosure usually prevents you from having to pay any deficit that might be owed on the property. The lender may also benefit as they can turn around and sell the house but avoid any legal costs they would incur if they had to foreclose on the home.

While a deed in lieu of foreclosure is more appealing than actual foreclosure to a lender, they aren't quick to agree to this option. Lenders typically require the borrower to first; prove that their delinquency was due to unavoidable hardship and to second; prove that they put forth a diligent effort to sell the house on their own. Once these conditions can be verified, then the lender may accept the offer, but it is not a guarantee.

Short sale

Homeowners often resort to a short sale when they owe significantly more on their home than what it is worth. If this is the scenario you are facing, you may be able to negotiate a short sale with your lender. In a short sale, you agree to sell the house for whatever you can get and turn the proceeds over to the lender who in turn agrees to forgive the remaining balance.

Short sales look bad on your credit and often show up as a settlement, which means you paid less than you owed. Settled debts are likely to be taxed, since the forgiven amount is considered income on which the IRS expects you pay taxes. There are ways around this tax bill, refer to Foreclosure Facts, the previous article in this month's newsletter, for more information.

Consent to foreclosure

This is the worst option when it comes to your home, but if all else fails, foreclosure may be the only option left. Depending on your lender and the state you live in, the ramifications of foreclosure may go further than just losing your home. You could end up being sued for any deficit between what the house actually sells for and the remainder of what you owe. Court costs and other legal fees are also likely to be added to your bill. And, of course, the damage to your credit will take some time to recover.

No matter how bad your current situation seems, there is always a way out. You've made a wise choice by letting us help you recover and rebuild. By following the suggestions outlined in our educational material, you will discover financial health and stability.