Homeowners Facing Foreclosure – What Are Their Options?
Many times, homeowners in foreclosure will come to me and ask, “What are my options at this point?” Right now they are facing foreclosure with the auction a month or two out. Here is my reply.
1. You can call your lender and ask them to reinstate the loan. You may be allowed to reinstate or make the loan current by paying a lump sum or making scheduled payments to your lender over a given amount of time. Explain to them you had a few bad months but now you are back on your feet and most lenders will try to work something out with you. This option typically works when the homeowners are not too far behind on payments and can prove that they are in a better financial situation.
When they reinstate the loan, the Notice of Default (NOD) is canceled, the home is brought out of foreclosure, and everyone is happy. However, the homeowner’s credit was nevertheless hit with the NOD which will hurt a little.
Something similar to reinstating the loan is called a Forbearance Agreement. This is when you truly negotiate a “deal” with the bank. You can ask the lender if they will add on the amount owed in back payments onto the back of the loan, or if they would take a smaller portion upfront and add the rest onto the back of the loan or pay some upfront and forgive the rest or you could already ask them to forgive the whole thing.
2. You can refinance your home. If there is lots of equity in your home and you’re not too far behind on payments, this is a great option. Usually the lender would refinance the existing loan and include as part of the new loan any late payments, and fees that you would need to regain control. The challenge that most homeowners have is they have leveraged their home to the max. consequently, very little equity exists in the home especially when you add on back payments and fees so it becomes very difficult to refinance. This is one of the reasons why California has one of the lowest foreclosure rates in the nation, because home values go up so quickly homeowners can refinance fairly easily if they ever get into trouble.
3. You can list your home with a realtor. If you have equity in the character this can also be a great option. However, if you have little to no equity, which is usually the case, it can be hard to sell a home in a short amount of time with a real estate agent. It’s nearly impossible when the home is over leveraged. The reason why is because you have to pay a realtor fee or commission when they list your house. Typically it’s 3-6% of the buy price. Real estate agents have to increase the buy price of the home to compensate for their commission and pay off the loan balance. If the foreclosure auction is approaching, they’ve got to find a qualified buyer quickly and usually this takes time.
4. You can sell the house yourself. All you need to do is put a FOR SALE sign in your front yard. You should tell everyone you are selling your home, maybe they know a friend or relative who is looking to buy in the neighborhood. If you live in a high traffic neighborhood with listings, you have a very good chance people will call you. Again, if your home is over-leveraged, you will have a very difficult time selling your home quickly.
5. You can give the character back to the lender. This course of action of transferring ownership from you to the lender under these circumstances is called a Deed in Lieu of Foreclosure, and is sometimes referred to as a “friendly foreclosure” because basically that what it is. You just walk away. A deed in lieu of foreclosure does not protect your credit, nor will it cut off the rights of junior lien holders. In other words, the lender would take the character back unprotected to the junior lien holders. This will avoid the possibility of a deficiency judgment in the event the character fails to produce enough to cover the noticeable debts after it goes to auction. So if you have equity in the character this is not a good option. You will give up all rights to receive any surplus from the auction. Using this option is like giving up. Don’t give up when you nevertheless have better options.
6. You can sell your home to an investor. Most investors will negotiate with your lender to accept a discount on your loan. This is called a short sale. What this does is allow the investor to buy your home under market value so you can avoid the foreclosure auction and then he can turn around and sell it for a profit.
7. You can file bankruptcy. There are several different “chapters” of bankruptcy. Some are work-out others are wipe-out, but here is the general idea. When someone files bankruptcy it’s almost like someone builds a “bullet-proof” obstacle around the house. No one can touch you! However, you are not free of all responsibility and most people do not understand that.
[Note: Bankruptcy should be the last alternative or option and should not be used to stop foreclosure unless you have no other option or else you need the protection of a bankruptcy due to other circumstances or situations you are currently up against. If you feel this may be your best option, please seek legal advice from a competent professional in this field.]
8. And finally, you can just let it go to foreclosure. Basically you don’t do anything. Typically you will get evicted after about 2-3 weeks. You leave with nothing in hand and a foreclosure on your credit report. This is without question the worst option of all. Don’t let anyone convince you to just give up and do nothing. at the minimum try something. You have nothing to lose. At this point there is nothing worse that can happen to you.