Every week, homeowners call our office because they have been told by a trusted Realtor or friend that we are in the business of short sale negotiation, and they are in need of avoiding foreclosure advice. They have missed a few mortgage payments and now their lender is getting more aggressive with pursuing foreclosure. It’s very important that homeowners understand the different alternatives to foreclosure that they have in front of them and that no one has really taken the time to explain.
1. Payoff/Refinance – Completely paying off the entire loan amount plus any default amount and fees. Usually this is accomplished through refinancing of the original debt. Since the homeowner most often has some credit damage already, the new debt is normally at a higher rate of interest. This is most commonly a solution when there is equity in the property.
2. Reinstatement – Paying the entire default amount, plus interest, late fees, attorney’s fees, and taxes. Often this is done by homeowners that missed their original mortgage payments due to a loss of employment, then caught up once they found a new job.
3. Loan Modification – Utilizing the existing mortgage company to refinance the debt or extend the terms of the loan…currently known as the HAMP program, or Home Affordable Modification Program. I won’t go into how unsuccessful this program has been, as I could write all day about it, but I will say this….since it’s inception in April of 2009, only about 14% of applications have been approved and the majority of our clients come to us after they have tried this option feeling like they were severely misled by their lender. Often they have had to spend thousands of additional dollars during the “review process” only to find out that they were denied.
4. Forebearance – Lender may be able to arrange a repayment plan based on the homeowner’s financial situation. This “payment plan” basically takes the past amount due and divides it up evenly over several months to help the homeowner catch up. The big problem with this is that the new payment under the plan is now HIGHER than their original payment. Let’s say you’re behind $6,000 and your regular mortgage payment, including your escrowed taxes and insurance, is $1,000/mo. The new payment plan could be, your $6,000 divided by 12 months (to “help” you out), or $500, TO BE INCLUDED WITH your regular payment of $1,000. So now, every month, for 12 months, you are supposed to send in $1,500, instead of your regular $1,000 so you can catch up. It’s easy to see that this isn’t much help to a homeowner trying to avoid foreclosure. The only one that wins in this situation is the lender – getting more money from the homeowner that is so emotionally attached to the house that they’ll do anything to keep it.
5. Bankruptcy – This option can liquidate debt, allow more time, and stop a foreclosure auction from occurring. However, the most mis-understood part of bankruptcy is that homeowners believe it will PREVENT foreclosure and this is NOT the case. Bankruptcy will stop foreclosure temporarily, but once the lender receives permission from the bankruptcy court to remove the property from the bankruptcy, or when the bankruptcy is discharged or dismissed, the foreclosure will continue from where it left off prior to the bankruptcy filing. It is possible then, for a homeowner to end up with both a bankruptcy AND a foreclosure on their credit.
6. Deed in Lieu – The voluntary transfer of title to the property from the homeowner to the foreclosing lender. This option is really nothing more than a voluntary foreclosure with very little difference to the resulting credit score of the homeowner. Lenders like to offer this as a “solution” because they get to avoid the cost and time associated with foreclosure, but the homeowner doesn’t get any real benefit.
7. Short Sale – The sale of the property in which the foreclosing lender agrees to accept less than the total amount owed. Lenders are eager to accept short sales instead of foreclosing because they almost always get more for the property than if they foreclose and the lender avoids all of the costs (both direct and indirect) associated with foreclosure.
Obviously, short sales are what we negotiate for our clients. Do they ALL work? No. But they are, without a doubt, ALWAYS worth a shot if a homeowner is facing foreclosure. The homeowner gets the benefit of staying in the house while the transaction is negotiated, often saving the necessary money to move, the loss is less to the lender, so they’re motivated to approve it, and the closing of a short sale has less of a negative impact on the real estate market for the area in which the house is located. The positives definitely outweigh the negatives.
If you find yourself behind on mortgage payments and the possibility of foreclosure may by imminent, make sure you educate yourself on your options so that you can make the best decision for you and your family.
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