Foreclosure Alternatives FAQs
Q: How could I possibly feel good about continuing to pay on a loan which is much more than the value of the house?
A: If you can afford to keep the house then you should consider doing so; there are serious ramifications to foreclosure as well as many of the alternatives. Your home is worth more than any stock you could ever invest in because it is a home, not JUST a business decision. You may have paid a lot of money out of your pocket to get into it, you paid more every month to keep it, and you may have even invested a lot of time and money in making the house into your home.
Q: How badly does a foreclosure ruin my credit score?
A: Generally you could expect a two to three hundred point decrease.
Q: I was contacted by someone who told me that for a fee, they could save my house from foreclosure by putting someone who is declaring bankruptcy on the title. Is that true?
A: No. Putting anyone on title will have no effect on the lenders entitlement to foreclose. It is a scam that will only cost you thousands of dollars and likely make foreclosure the only way of getting that person off of title. Contact your local District Attorney if you have already fallen victim to this common scam or to get more information on it.
Q: Should I try to refinance my loan if I am having problems making the payment?
A: If refinancing would definitely make a difference in being able to avoid foreclosure, then it may be a good idea, but you have to take other factors into consideration. First, either you or the house may not qualify for the refinance because if you are struggling with the payments now, a lender may not want to take a chance on loaning you the money. Additionally, if the lender sees you as a good risk, the house may not have enough equity in it to qualify. Most importantly, you should consider the odds of losing the home later, because if your loan was originally a nonrecourse loan, it would be a recourse loan after you refinance.
Q: How do I know if my loan is a recourse loan?
A: California has a state law that prohibits lenders from having any recourse if they foreclose or settle for less than owed IF the loan was original purchase money. Recourse loans are ones loans that were taken out after the house was purchased or original purchase loans that were refinanced.
Q: What disadvantages are there to letting the home go to foreclosure?
A: There are several disadvantages:
- You could expect a major credit score drop, which means all new loans for the next several years would be at a much higher interest rate.
- Fannie Mae will not buy loans if the borrower had a foreclosure within five years prior. Loans that qualify to be sold to Fannie Mae are typically better loans than subprime loans.
- In some cases the lender(s) could still come after you for the difference in what they sell the property for and what your owed on the loan(s) plus penalties, and their foreclosure costs. (See recourse loans)
Q: Are there any advantages to letting the home go to foreclosure?
A: Yes. You could also live in the house without making payments while the foreclosure is processed. A short sale would give you the same benefit and many others.
Q: Could a loan modification help me avoid a foreclosure?
A: It depends on your situation… if you have an income, and want to stay in the house, you may qualify for a loan modification. It is definitely worth a shot and if nothing else, it will at least stall the foreclosure while they try to qualify you. The problem with the current loan modifications are that they do not reduce the principal balance, so the reduction in interest rate may not make the payment low enough to give you the breathing room you need.
Q: Do I have to keep making payments while I am trying to qualify for a loan modification?
A: Unfortunately most lenders will not consider you for a loan modification until you stop making payments which means your credit score will suffer. It’s kind of an unwritten rule. They figure if you can keep making the payments, there is no reason for them to do a loan modification. But at some point in the process they may require you to begin making at least a minimum monthly payment and there will be no guarantee they will ultimately approve your modification.
Q: Do I need a professional to negotiate a loan modification?
A: It’s not necessary. Some are successful at doing it themselves. There is no guarantee a loan modification specialist can accomplish anything you cannot do yourself. It’s a numbers game for the lender.
Q: How much do professionals charge to try the loan modification?
A: There is no set fee but you can usually count on paying at lease couple of thousand dollars for a reputable company to do the work for you. Keep in mind that in California, it is illegal for anyone (with the exception of an attorney), to charge you an upfront fee for the service.
Q: I tried to get a loan modification but the lender didn’t approve me. Is there something else I can do to avoid foreclosure?
A: Yes, you could do a short sale or a deed in lieu of foreclosure.
Q: What exactly is a short sale?
A: A short sale is when you find a buyer to buy the property at today’s fair market value and the lender(s) agree to take the proceeds of that sale as payment in full.
Q: Do all lenders agree to a short sale?
A: Almost all lenders will agree to a short sale. Some have not agreed in the past, but most of them are starting to see the light. A lender will typically lose anywhere between $25,000 and $75,000 more with a foreclosure than a short sale.
Q: Will I still owe the deficient balance if the lender agrees to the short sale?
A: In most cases, the entire balance will be forgiven. In the rare cases where the lender does not agree to forgive the balance, the seller/borrower may be able to settle by signing an unsecured low or no interest note.
Q: What if the offer is too low?
A: If the offer is too low the lender will likely counter with a higher offer. If the buyer walks, you start the process over again. The lender may consider a lower offer later… On one of my short sales, BofA countered and the buyer walked then after 4 months the same buyer submitted an offer that was $50,000 lower than their initial offer and BofA took it.
But the problem with that decision is that if they were going to come after you with a shot sale, you can bet they will after a foreclosure as well. But with a foreclosure the deficient balance will be much higher since the property will likely sell for less, interest and penalties continued to accrue and they will also want you to pay for their foreclosure costs.
Q: Could I still do a short sale if I have more than one loan on the house and the house sells for less than what is owed to the most senior lender?
A: Yes. Most senior lenders will actually settle with the junior lenders to entice them to release the lien.
Q: Who pay for the closing costs and Realtor commissions associated with the sale?
A: The settling lender will pay the closing costs, Realtor commissions, and even the property taxes.
Q: Do I still have to pay my mortgage if I am requesting a short sale?
A: Not necessarily. As with loan modifications, the lenders seem to lack motivation if you are making payments. Start saving the money you would be paying, for the move. If it’s going to be vacant anyhow, consider renting the house on a month to month basis for less than market rent. Be sure to fully disclose the situation!
Q: I heard that it can take more than six months to get a short sale approved. Would I have to keep letting people see my house all that time?
A: Not if it’s done right. I usually have my homes on the market for less than 3 weeks. Once I know I have the highest offer the market will bear, I can take the home off the market while the lender processes and considers the short sale.
Q: Can I still request a short sale if the house has a tenant in it?
A: Yes. A short sale can be accomplished regardless of who is in it or even if it is vacant.
Q: Would I have to pay the lender what I am collecting in rent while I am waiting for the short sale?
A: If you are a super nice person you could, but there is no law or requirement I am aware of that would make it necessary.
Q: Do I have to pay the utilities while I am waiting for the lender to approve the short sale?
A: During the sale of the house the landscape must be maintained in the condition it was in when the buyer’s made the offer. The electricity should be left on so they buyers can complete their physical inspection.
Q: Will I have to fix up or repair problems with the house prior to closing escrow?
A: No since most lenders will not pay for repairs although they will consider covering closing costs for the buyer. A competent buyer’s agent will let the buyers know this so they can write their offer based on the current KNOWN condition of the property and the knowledge that if there is something else found later, it will not be fixed.
Q: Could the buyer be related to me?
A: Not usually, but I have been successful the only time I have tried. Most lenders will not approve a short sale if it is not an arm’s length sale. A competent agent may be able to negotiate it by demonstrating the lender is getting a better offer from the relative than they would from a buyer off the street.
Q: How badly will my credit be affected with a short sale?
A: Your credit score should be a little less affected with a short sale than a foreclosure. The definite advantages are that any deficiency can usually be negotiated away, you will not have to answer “yes” on every loan application that asks if you have ever had a repossession or foreclosure, future lenders will look upon a short sale better than a foreclosure because they know you at least tried to minimize the loss which says something about your character, you will also be able to qualify for a FNMA loan much sooner than if it was foreclose upon.
If you currently feel that with all of the stress the mortgage payments have on you, you don’t care if you ever own a home again or you are not concerned about your credit, please consider this… you are a home owner in spite of the fact that it has always been less expensive that renting. Your current situation will not be the same in another one or two years, AND there are definite advantages to owning a home rather than renting one. Additionally, I believe when you see a house similar to the one you paid $XXX,XXX for on the market for less than half that, you will wish you had the best credit possible so you could take advantage of the low prices. If you have any questions or need assistance regarding Foreclosure, Please email: firstname.lastname@example.org or Call: (858) 605-8648