What are my options to prevent a foreclosure of my home?
When facing foreclosure it is important that homeowners understand all of the options available to help prevent foreclosure. Understanding these options will help in making an educated decision on next steps and feel comfortable knowing they have done everything possible. These are the 8 basic options available to homeowners that are facing foreclosure.
- Re-negotiate with the Current Lender:
A forbearance agreement is a repayment agreement between the borrower and their lender, which contains a plan to reinstate their mortgage. A typical forbearance agreement requires the homeowner to pay at least 20% or more of the total delinquencies including all fees related to foreclosure. The remaining 80% balance is usually added to the homeowner’s monthly payments over a period of 6 to 48 months. A forbearance plan usually does not remove the foreclosure auction, but stops the foreclosure until the loan is brought current.
A loan modification is a permanent change in one or more terms of the loan agreement in an effort to get the loan reinstated and to arrange payments the homeowner can afford. Most common is that delinquent payments and foreclosure fees are added onto the back end of the loan. Payments can remain approximately the same. In some cases the interest rate may be reduced permanently.
Deed-in-Lieu of Foreclosure
For homeowners who have no chance to save or sell their property and want to end the foreclosure process, a deed-in-lieu of foreclosure may be an option. A deed in lieu of foreclosure is a deed instrument in which a homeowner conveys all interest in the property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings. Deed-in-lieu of Foreclosure, also known as a “Friendly Foreclosure,” is not as damaging as letting the home go to foreclosure. In most cases the homeowner will show on their credit that they defaulted on the loan and the bank took the home back. It is still considered a form of foreclosure which can prevent a homeowner from purchasing a home for 5 -7 years, according to the FHA guidelines. A homeowner should seriously consider all other options before any type of foreclosure.
- Refinance The Property or Use a Hard Money Lender:
A few years ago refinancing was easy to do, and was a viable option for homeowners. Things have changed significantly since then, and it has become difficult to qualify for a refinance, especially if a homeowner is experiencing a financial hardship and has little or no equity. Nowadays, a homeowner would usually have to try a refinance before they stop making payments, have a minimum of 20% equity and they must show in detail that they are financially stable enough to pay the new mortgage. A typical hard money situation will require 4%-6% of the loan amount in fees upfront, 12%-16% interest rate and 40% or more equity in the home. Although refinancing is the first option homeowners think of when facing foreclosure, in most cases it is not a viable solution to prevent foreclosure.
- Borrow Money From Friend or Relative
Some homeowner’s may experience a short term financial hardship such as a minor injury preventing them from working or some other temporary decrease in income or increase in expenses. If this is the case, borrowing money from a friend or relative can help! When considering borrowing money from friends or family it’s important for a homeowner to consider their entire situation and whether or not the financial hardship is something temporary and can be overcome or if it’s something long term in which they may not be able to pay back money borrowed.
- List the Property with a Real Estate Agent:
If the homeowner truly wants out of the home, selling it is another option to consider. In selling the home, the homeowner needs to remember that there are costs in getting the home to sale-able condition. A good tip for homeowners exploring this option is to get a broker price opinion, where a real estate broker will come out and evaluate their home and give them a realistic time frame of how long other comparable homes in the area are taking to sell. Next, there are closing costs to consider. Generally speaking, the homeowner can count on roughly 8% of the sales price of the home being paid in closing costs (commissions, taxes, escrow, etc). This can be a deal breaker for those homeowners who are at 92% LTV or higher and do not have enough equity in the home to go to closing. Many find themselves in this position selling their home and come to the closing table having to pay out of their pocket just to complete the transaction.
- Sell the property yourself:
FSBO - For Sale By Owner
Many homeowners consider selling their homes on their own to save on commissions. They may feel that since they are in foreclosure and owe back payments they will try and save on the realtor’s commissions in order to do so. Although it may be a good way to save some money there are things to consider before attempting doing so. At times it can be difficult selling a home when not in foreclosure, attempting this while in foreclosure can be even more difficult. Pricing a home correctly requires the knowledge to understand the market value for the area and how to compare apples to apples. Also, it typically takes longer to sell a home for sale by owner since the homeowner usually does not know how to market the property with maximum exposure as compared to a realtor. There are also closing costs to consider, especially when the buyer who brings an offer is represented by a Realtor.
Sell to an investor
If a homeowner should need to sell their home fast, a cash investor can be the prefect solution for them. Depending on the homes value and the amount owed against the home, the homeowner may receive some “starting over money” from the investor who purchases the property. A successful pre-foreclosure sale will avoid the homeowner from have the mark of foreclosure on their credit and this alternative can be quick. Sometimes it can be done within a matter of days. All closing cost expenses are avoided and the homeowner is not obligated to spend money getting the house ready for resale.
Filing bankruptcy is usually not a long term solution to foreclosure, but it can temporarily postpone the foreclosure process. Once a borrower in default files a petition for bankruptcy, foreclosure proceedings stop immediately. Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. In 2004, a study was conducted that showed almost 95% of homeowners that filed bankruptcy to stop their foreclosure ended up losing their home within a year.
- Short Sale
A Short Sale is usually for homeowners who have little or no equity in their homes. With this option, the lender(s) will allow the homeowner to sell the property for less than what is owed on the property as long as they can provide proof of financial hardship. More importantly, the advantages to homeowners are the forgiveness of the debt owed, in most cases, also it will be less damaging to their credit allowing a homeowner the opportunity to repair their credit and also purchase another home much sooner than if they were let it go to foreclosure.
It is important for a homeowner who decides to short sell their home to understand they only have one chance at it. This means they should select a qualified individual or team to assist them in the process. Many times, people select a family member or friend who is a realtor to sell their home for them. What they do not understand is a short sale is not just selling a home, but also takes a strong understanding of the foreclosure process and how to negotiate with the lenders.
- Do Nothing and allow the bank to foreclose:
Doing nothing and letting the bank take the home can cause severe damage to the homeowner’s credit for many years. Also, homeowners will lose their home and most likely the equity they have accrued. Foreclosure can affect their ability to secure another mortgage loan in the future as it stays on credit reports for up to seven years.
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