Alternatives to Foreclosure

Problems a Foreclosure creates:  (also see Foreclosure FAQs)

  • Loss of all the money the homeowner put into the home when purchased and while owning it
  • Credit score damaged for as much as 10 years
  • Inability to buy another home using preferred financing (Fannie Mae or Freddie Mac) for 5 to 7 years
  • The lender(s) may pursue you for the deficient balance (if your loan was a recourse loan)
  • Loan applications ask if you have “EVER” had a foreclosure or Deed in Lieu of Foreclosure
  • You don´t have the satisfaction of knowing you did everything you could to pay your debt as you would with one of the viable alternatives

Alternatives to Foreclosure  (also see Foreclosure FAQs)

  1. Loan Modification – Utilizing the existing mortgage company to refinance the debt or extend the terms of the loan. This may allow the homeowner to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problem that caused the late payment and that you can afford to make the payments with the new terms.
  2. Forbearance – The lender can offer a temporary payment reduction or suspension of payments. Any missed payments will either be added to the back of the loan (accruing interest), or add the difference to the original loan payment once the payment suspension is over. This option is useful if the homeowner experienced a temporary loss/reduction of income or a temporary increase in expenditures.
  3. Partial Claim – A loan from the lender for a 2nd TD loan to include back payments, costs and fees. Must qualify for the loan which will very likely be at a higher interest rate and it would surely be a recourse loan, if you were to end up in default later.
  4. Settle with Junior Lien Holders – Junior lien holders may take as little as 5% (usually 10%-20%) of the amount owed if you can show that the loan would be completely wiped out if foreclosed upon by the 1stTD holder.
  5. Sale – If the property has equity, the homeowner may sell the home without lender approval through a conventional home sale.
  6. Sell and bring in money – Bring a check for the difference between the sale price and the amount owed the lender(s).
  7. Short Sale– The house is sold for the highest price the market will bare and the lender(s) agrees to accept the proceeds as payment for the loan(s).  In most cases this will eliminate a future deficiency judgment. The lender pays the closing costs and a settlement with junior lien holder(s).
  8. Continue Struggling – Unfortunately some homeowners deplete their entire savings, retirement, and children´s college tuition before they request a short sale.
  9. Payoff/Refinance – This is rarely an option because if you are already into the foreclosure process, you have already damaged your credit and alerted potential lenders that you are having trouble. And if you are already having trouble paying your current mortgage, then getting a loan for a different one at an even higher interest rate is usually not possible. In addition, the property will need equity to qualify. Avoid borrowing from a friend or relative to do this; trying to save a house that is not worth the amount owed is probably not worth jeopardizing a relationship if things don´t go as planned.
  10. Reinstatement – Pay the entire default amount plus interest, attorney fees, and late fees.
  11. Deed in Lieu of Foreclosure – Give the property back to the bank instead of the bank foreclosing. Banks generally require the home to be well-maintained, all taxes current and there cannot be a junior lien holder. I would use this as a last resort to try to avoid a deficiency judgment if a short sale was not approved. Most loan applications ask if this has ever happened.
  12. Bankruptcy – This option can liquidate debt and/or allow more time. There is no guarantee a homeowner will be able to keep the house since it does not erase mortgage secured debt. Check with a bankruptcy attorney to see if you could be eligible to settle with any junior lien holders.
    –Chapter 7 (Liquidation) – To completely settle personal debt
    –Chapter 13 (Wage Earner Plan) – Payment plan to pay off debts in 3-5 years.
    –Chapter 11 (Business Reorganization) – A business debt solution.  

(also see Foreclosure FAQs)

This information does not replace advice from other professionals such as attorneys and or tax advisors.


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