Real Estate Law Article: Alternatives to Foreclosure
If you are facing a foreclosure, you may have more options than you think. Your options will depend on whether you want to try to keep your home or whether you are willing to walk away from your home.
What are my options if I want to keep my home?
Clearly, your first option is to reinstate your mortgage. If you have the funds, or can easily obtain them, you can simply make up the missed payments plus any fees and interest your lender charges you.
However, many people do not have the cash available to reinstate their mortgage. The next option is to negotiate a workout with your lender. The idea is that the loan terms are reworked in a way that allows you to afford the payments and make up for any payments that you missed.
You can begin this process by contacting a HUD-approved housing counselor who can help you stay in your home and do not charge you for their services. You can find a counselor by visiting www.makinghomeaffordable.gov or by calling 1-888-995-HOPE.
If you are able to negotiate a workout you may be able to obtain a forbearance (temporary relief from making your monthly mortgage payments), a lower interest rate, a principal reduction, a change in the length or type of the mortgage, or a payment plan that adds your missed payments (and fees and interest) to the end of your loan period or adds a percentage to each monthly payment. Depending on your loan, you may have other loan modification programs available to you. Talk to your housing counselor or real estate attorney for more information.
Another option is to refinance your home. Essentially, you find a new loan at a better interest rate, or longer period, and pay off your old loan. This may be difficult or impossible to do if your home is significantly underwater or the housing prices in your area continue to decline. If you have a Fannie Mae or Freddie Mac mortgage you may be able to obtain a refinance by qualifying under the Home Affordable Refinance Program. Be very careful when refinancing your home because many refinance schemes are carefully disguised frauds. Contact your business law attorney if you need assistance in detecting a scheme or fraud.
You may also file for bankruptcy. Filing for bankruptcy will often place an automatic stay on your lender’s ability to foreclose on your home. If you file a Chapter 13 bankruptcy, you come up with a plan for making your monthly payments and satisfying your outstanding debts. If the Bankruptcy Court approves this plan, you’ll typically have three to five years to pay off your plan. You can sometimes reduce the interest rates of your mortgage under a Chapter 13 bankruptcy plan. This is beneficial if you have a temporary decrease in income but now can afford to make your monthly payments as well as make up your other missed payments. You may file for a Chapter 13 just about any time before the foreclosure sale. You can also continue to negotiate a modification while your Chapter 13 bankruptcy is ongoing. A bankruptcy does not disqualify homeowners from obtaining a home loan modification but it will likely slow the approval process. This is because many loan servicers have a seperate department that handles the modification process for homeowners going through a bankruptcy. If you file a Chapter 7 bankruptcy, you may be able to get our from under any unsecured debts you may have. This will free up cash so you can make your monthly mortgage payment.
Lastly, you can defend against the foreclosure in court. This option is only viable if you can show that your lender violated state laws or the terms of your mortgage agreement. You may be able to get the Courts to set aside the lender’s foreclosure proceedings. In the least, you may be able to temporarily stall the foreclosure proceedings.
What are my options if I do not want to keep my house?
In this scenario, your first option is a strategic default wherein you walk away from the home and allow the bank to foreclose. A foreclosure will typically drop your credit score by at least 100 points. A You only want to pursue this option if your lender does not have rights to sue you for a deficiency judgment if balance of your loan is higher than the foreclosure sale price of your home. If your debt is only secured by the home itself, and you did not sign a personal guarantee, then your lender’s only recourse is to foreclose on the house and you would not owe anything further to the lender. You will likely be subject to an income tax on the amount of the debt that you did not have to repay (the balance of the loan minus the foreclosure sale price of the home).
Your next option is to arrange a short sale. A short sale is when the bank allows you to sell the house for less than what is owed on it. If the bank approves such a sale, you will not have to repay the bank the difference. Your lender will review each proposed short sale on its merits and will usually agree to postpone the foreclosure if a buyer signs a purchase and sale agreement. You will need to list the property for sale and make a good faith effort to sell the property for as much as you can. The bank will want to review the steps you have taken to ensure that the offer presented is the best you can do. If you have a second mortgage, you will have to get that lender’s permission for a short sale as well. A short sale is often preferred because it has less of an impact on your credit score than a foreclosure does.
You may also file for bankruptcy. Even if you do not wish to stay in your home, filing a bankruptcy proceeding will often allow you to stay in your home for several months rent-free. A foreclosure proceeding is often stayed by the filing of a bankruptcy.
Lastly, you can arrange a deed-in-lieu of foreclosure. This is where you simply hand over the title to the property to your lender in exchange for getting out of your debt. In accepting title to the property, lenders also accept responsibility for all liens against the property including judgments, junior liens, lease obligations, etc. A lender will often require you to attempt to sell your home before they will agree to a deed-in-lieu of foreclosure. You will want your lender to agree in writing that they will not go after you for any deficiency that remains on your property. If you have a second mortgage, you will likely not be able to arrange a deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure is also believed to have less of a impact on your credit score than a foreclosure.
Legal Disclaimer: The information on this page does not constitute legal advice and should not be relied upon as each situation is fact specific and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. The information on this page is solely for the purpose of legal education and is intended to only provide general information about the matters stated therein. The information on this page should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area of the matters stated therein. No attorney-client relationship is formed without an actual agreement confirmed in writing. I am licensed only in Washington and Oregon.