Take the time to know the benefits & drawbacks of the most common alternatives to foreclosure. There are many options available to you rather than foreclosure. Here is a brief summary of eight alternatives to foreclosure. You may have other options available as well.
Solutions If You Want To Keep Your Home
Bring your payments current (also, "reinstatement")
You pay your lender the full amount due, including all back payments, fines and fees. Although this is often difficult, you may get a new job, get assistance from family, cash-in other assets, etc. Homeowners can reinstate a mortgage up to the day before a final foreclosure sale, and it doesn't require lender approval. This solution only works if you can continue to make the payments on a go forward basis. Honestly assess your ability to maintain your mortgage payment "as-is" before you consider this method. You may be throwing good money after bad if you cannot maintain the unadjusted monthly payments.
Rent the property
For homeowners who have mortgage payments low enough that a rental payment allows the loan to be paid. With rental properties, however, many expenses, taxes, insurance and landlord responsibilities are a factor, and rental income may not cover the full cost of ownership and maintenance. If a solution for you, you can keep the property indefinitely while living somewhere else. Carefully consider this option as many renters will discontinue making rental payments if they discover that you are delinquent on your mortgage payments. The additional hassle of collection and/or eviction is not an additional difficulty that anyone needs.
If you can make payments on your loan, but don't have enough money to bring your account current, your lender may change the terms of your original loan to absorb your delinquent payments and make the payments more affordable. Your loan could be permanently changed by adding the missed payments to the back end of the existing loan balance, or lowering the interest rate or making an adjustable rate fixed, or extending the number of years you have to repay your loan. Homeowners must qualify for the new payment and requires full documentation. Because of additional debt such as credit cards, car payments, medical bills, and student loans, some people do not qualify for a loan modification. Unfortunately loan modification as an alternative has become more and more difficult to obtain and the quality of loan modifications has declined steadily. Visit our Facts About Loan Modification page for more information.
If you have enough equity in your home and your credit is still in good standing, you may be able to refinance an unaffordable loan and achieve lower payments. With today's housing values and the costs of refinancing, a homeowner must be sure a refinance is a possible solution. If you purchased your home with little or no money down or your home has gone down in value, you may not quality for a refinance. Make sure you really have equity in the home before squandering precious time on this option. Many lenders aggressively pursue you as a client and require you to pay for the appraisal up-front only to decline your application when the appraisal comes in low.
Payment plan (also, "forbearance")
A forbearance agreement means you pay only a portion of your regular payment -- or no payment at all -- for a specific period of time based on your current financial situation. This temporary solution provides time to save money, pay off other bills, find employment or additional employment, or recover from injury or illness. At the end of the forbearance period, you begin making regular payments as well as an additional amount to pay off the past-due amount. Active duty military service members may be eligible for special mortgage relief assistance. Only pursue this option if you can maintain the payments. Don't throw good money after bad.
In some situations and in some states bankruptcy stalls the foreclosure process (typically for six months) and may allow you to live in your home and repay your lender under different terms. If a homeowner has significant non-mortgage debts that prohibit you from making your mortgage payment -- and a personal bankruptcy will eliminate these debts -- bankruptcy may be an option. The problem is most people that go through bankruptcy have not solved their problem. If you cannot afford your home, you may end up in foreclosure again within a short time. Bankruptcy is expensive, damages your credit and can only be declared once every seven years. Furthermore; it is not reliably effective in allowing you to keep your home. It fails quite often.
Solutions If You Cannot Keep Your Home
If you owe more on your home than the home is worth, and don't want to declare bankruptcy (because it won't solve your financial problem), you can hire a short sale real estate specialist to market the property and negotiate a short sale agreement with your lender or mortgage servicer. A short sale allows you to avoid foreclosure and minimize the damage to your credit score. You may avoid a deficiency judgment if your lender forgives your mortgage debt in its entirety according to the terms outlined in The Mortgage Debt Relief Act of 2007. Also a short sale keeps a foreclosure off your credit record. Fannie Mae has reduced the mandatory waiting period to establish credit history after a short sale to 2 years. This waiting period after a short sale is lower than the required 5-7 years following a foreclosure. The benefits of a short sale vs. foreclosure are numerous. Visit our Benefits Of A Short Sale page for more information or our Short Sale vs. Foreclosure page for a direct comparison.
Deed-in-lieu of foreclosure (also, "friendly foreclosure")
Deed-in-lieu of foreclosure means you return the deed and house to the bank instead of facing foreclosure and walk away. Lender approval is required. If you have more than one mortgage this is not an option for you. Some lenders want to see the house on the market for at least 3 months before they consider accepting a deed in lieu. By voluntarily transferring the deed, you save your lender tens-of-thousands of dollars in foreclosure proceedings. Fannie Mae has reduced the mandatory waiting period to establish credit history to a minimum of 4 years. This waiting period after a deed-in-lieu of foreclosure is lower than the required 5-7 years following a foreclosure. Although a deed-in-lieu may have less impact than an actual foreclosure on your ability to establish homeownership in the future, if you are going to cooperate with your lender and take a proactive approach, a short sale is generally the better option.
As local Orange County real estate short sale specialists we can help you make sense out of your options. We're here to help you make the decision that is right for you.