Five Alternatives to Foreclosure
By Kimberly Harrington
For homeowners who find they are struggling to keep up with their mortgage payments foreclosure is a real threat lurking around the corner. If you have missed a payment, know it is only a matter of time before you will or even if the foreclosure process has already begun NOW is the time to sit down and understand all of your options. The sooner the better! Some options that may be available to you could help you avoid foreclosure and maybe even allow you to stay in your home.
There are five options to consider if you are facing a foreclosure. The first one is loan forbearance. Loan forbearance is when your lender will reduce or suspend your mortgage payments for a certain amount of time. With loan forbearance the lender agrees to not foreclose on the homeowner while the homeowner agrees to a payment plan that will bring them current over a period of time. The lender will tack any fees, missed payments, and interest on to the end of the loan. Loan forbearance should only be considered by homeowners who are facing a temporary financial crisis such as a medical condition, natural disaster or temporary unemployment.
The second option is a loan modification. A loan modification is when the lender will modify the original terms of the mortgage by lowering the interest rate on the mortgage and/or extending the loan term. This helps the homeowner because it reduces the monthly mortgage payment. The reduction of payment can be from $100 and up and you must qualify financially to be considered for a loan modification program.
A third option would be to declare bankruptcy. This option should only be consider if clearing the other debt would allow you to stay in your home or if because of the other increasing debt you would have to file anyway. A bankruptcy can greatly affect your credit score and should not be considered lightly.
A fourth option would be a short sale. A short sale is done when the property is worth less than what is owed on the loan and the bank allows the homeowner to sell the home for a discounted price. The homeowner must be able to provide a reason for the need to sell, some type of hardship is needed for the bank to agree to allow a short sale to take place. When negotiating with the bank it is important to include waiving the deficiency as part of the deal. It is possible to short sale a property even if there is more than one lien but the other liens must be negotiated as part of the sale as well. You obviously will not be able to remain in the home (not even as a renter) but often a short sale is better for your credit than a foreclosure.
The last option is called a deed-in-lieu of foreclosure. This is when you don’t qualify for any other option and cannot sell your house through a short sale. A deed-in-lieu, simply put, means you will voluntarily hand your house over to the bank. It is important to keep in mind that a deed in lieu is difficult if not impossible if you have more than one lien on the property (though in very rare cases if the both liens are held by the same lender it could be considered). As with a short sale you will not be able to stay in your home, but a deed in lieu may not be as damaging to your credit as a foreclosure.
It is also important to really evaluate your situation and be completely honest with yourself. If you were to pursue a loan modification would it only be postponing the inevitable? Do you qualify for a short sale? It is also very import that you do not hide from the situation. It will not go away with inaction but you may be able to do something about it. Talking to your lender or an attorney are both good places to start to see what options are available to you. Keep in mind every situation is unique. All of the above mentioned options will have some impact on your credit; some more than others.