9 Options When Facing Foreclosure

So you are behind in your payments.  Banks are calling; telling you some odd scenarios- basically trying to scare you.  Foreclosures and short sales are the number one thing people ask me about.  So here are 9 options when facing foreclosure.

1. Do Nothing – If a homeowner does nothing, they will most likely loose their home to a foreclosure auction. Loan applications generally ask if the applicant has ever been foreclosed upon.  Credit reports also disclose this damaging information. Probably the worst option unless you win the Powerball.

2. Payoff/Refinance – Completely paying off the entire loan amount plus any default amount and fees.  Usually this is accomplished through a refinance of the debt.  New debt is at a normally higher interest rate and there may be a prepayment penalty because of the recent default.  With this option, there should be equity in the home.

3. Reinstatement – Paying the entire default amount plus the interest, attorney fees, late fees, taxes, missed payments and fees.

4. Loan Modification – Utilizing the existing mortgage company to refinance the debt or extend the terms of the loan.  This may allow the homeowner to catch up at a more affordable level.  To qualify you must prove to the lender you have fixed the problem that caused the late payment.

5. Forebearance – Lender may be able to arrange a repayment plan based on the homeowner’s financial situation.  The lender may even be able to provide a temporary payment reduction or suspension of payments.  Information will be required from the lender to show that you are able to meet the new payment plan requirements.

6. Partial Claim – A loan from the lender for a 2nd loan to include back payments, costs and fees.

7. Deed in Lieu of Foreclosure (some call it jingle mail as people just send the keys back) – Give the property back to the bank instead of the bank foreclosing.  Banks generally require the home be well maintained, all mortgage payment and taxes must be current.  Most loan applications ask if this has ever happened.  This seems silly.  “The house has to be in good shape and everything current.” They would prefer to wait for the actual foreclosure than to accept a house behing in payments.  That sounds unlikely.

8. Bankruptcy – This option can liquidate debt and/or allow more time.  You need to talk to a qualified attorney.  But here are the basics.

• Chapter 7 (Liquidation) To completely settle personal debt.
• Chapter 13 (Wage Earner Plan)  Payments are made toward a plan to pay off debts in 3-5 years.  I have heard this very strict and most plans don’t succeed.
• Chapter 11 (Business Reorganization) A business debt solution.

9. Sale  or Short Sale – If the property has equity (money left over after all loans and monetary encumbrances are paid).  The homeowner may sell the home without lender approval through a conventional home sale.  In this case, the homeowner will get cash from the sale.  On the other hand, a Short Sale, also known as a pre-foreclosure sale, can be negotiated with your lender by your Realtor or a Short Sale Negotiator if what is owed is MORE than the property’s value.

More on Short Sales and Foreclosures to come.