How to Avoid Foreclosure
Avoiding foreclosure is similar to avoiding bankruptcy: almost anything is preferred over either. There are many options available to people who have a delinquent mortgage, and struggling homeowners should consider any and every alternative to foreclosure.
Avoiding foreclosure is a move that prevents the loss of a home and severe damage to credit scores. However, there are many ways to avoid foreclosure, and all of them have different results and consequences. From reinstatement to bankruptcy, foreclosure avoidance options vary from minimal to severe impacts, and homeowners often do not know where to begin. That is why it is recommended that homeowners contact experts in the field who can guide the homeowner to the best option for their specific scenario. These experts can be real estate agents or HUD-approved mortgage counselors and they are the first resource when it comes to foreclosure prevention.
Use this guide to learn more about avoiding foreclosure and where you can get more information. Click on any topic below to skip directly to that section:
- Short Sale
- Rent the Home
- Deed-in-Lieu of Foreclosure
- Mortgage Modification
- Service Members Civil Relief Act
- Contact Real Estate by Design Idaho
When you are behind on mortgage payments, your account becomes delinquent. It does not matter if you cannot make your payments because you suffered a difficult injury that caused you to be unable to work, or if you spent too much money on a new television and a pair of boots. The mortgage company generally does not care why it happened, and your account is marked as delinquent. With that said, if you know you are going to be late on a payment due to any kind of a hardship, do call your mortgage company to see if you can prevent them from reporting it or look into other options.
Reinstatement of a delinquent mortgage means catching up with your payments to make the account current again. This means paying any late fees, missed payments, and accrued interest in order to get the account in good standing. Once everything is paid, the foreclosure stops, and the person is no longer at risk of losing their home.
Credit scores are impacted greatly by missed payments, especially in cases where the homeowner previously had good credit. However, no late payment is as harmful or long-lasting as a foreclosure. Reinstatement is the best option for homeowners who can get the money together to get their account current.
Getting the money together to cover delinquent payments is a different task for each borrower. Some may qualify for home equity loans, which cause more debt but cover the cost of delinquency. Others may be able to sell personal items to cover the cost of reinstatement. Even if a person must ask for a loan from a family member or friend, it may be a better option than foreclosure. Although it is counterintuitive that accruing more debt during a time of financial crisis can be helpful, sometimes it is the best option.
When a person is suffering a financial crisis, it is not likely that he or she will be able to get the funds together to reinstate the loan. However, this is available as a best-case scenario and should be pursued whenever possible.
Sometimes, it simply is not possible to get the money to pay missed payments and fees to get the mortgage payments up to date. For people with average incomes, missed payments build up quickly and become insurmountable within months. Homeowners may need to consider the possibility that they will not be able to pursue other financial options, and they should consider selling the home. A short sale is selling the home for an amount that is less than the amount owed to the mortgage company, so this is only an option when homeowners owe more on their home than it is currently worth.
What happens to the remaining amount depends on the agreement with the lender. The lender or bank may agree to forgive the debt. The bank may also agree to the short sale but sue the homeowner for the remaining debt owed. It is primarily dependent on the cost of recovering that amount versus the amount owed. In Idaho, homeowners are somewhat protected from this because a lender only has 90 days to sue for the remaining amount on first mortgages, but they have five years on second mortgages. This lengthy time frame has taken some homeowners by surprise, as they are hit with lawsuits years after a short sale.
Some homeowners are taken off guard when they are sued following a short sale, so it is important to realize that this possibility exists prior to negotiations with the lending company. They can waive the right to deficiency judgements, which prevents them from having the ability to sue. If they do sue, you may be able to offer a settlement that is less than the remaining amount of the mortgage. Another option is to declare bankruptcy. Bankruptcy can halt foreclosures and make the bank consider alternative payment plans for the borrower. These intricacies of the law are why it is so important to have an experienced professional on your team when dealing with a potential foreclosure.
Short sales are an appealing option for many homeowners who are in over their head when it comes to their debt, but they are not always a fixall. Fortunately, Idaho is a state that restricts deficiency judgements to a certain extent by limiting the time frame in which it can occur. Some states completely deny the mortgage companies right to deficiency judgements, but other states allow for it many years after a short sale. Speaking to a real estate broker and/or mortgage counselor will help you to understand the possibilities in your short sale.
When looking at the two options of reinstatement or short sales, it can seem as if home loans are a pay-or-sell entity that leaves no room for the in-between, and that is not the case. One of the most common things that happen when a homeowner falls delinquent is that he or she gradually pays back his or her past-due amount, along with their current payments, over time. This occurs after an agreed-upon time period where the homeowner has reduced or no payments due, and this is called a forbearance. Forbearances provide debt relief and a repayment plan that is achievable with very few negative consequences. They are basically a reasonable agreement between a mortgage company and a borrower that occur when a borrower falls behind on payments.
There are three types of forbearances: special, informal, and formal. Each option differs a little but the overarching idea is the same for all three.
When a loan is more than 90 days late but is not in foreclosure, a special forbearance may be an option as long as the payments are not more than 12 months late. If it is an FHA loan, then the financial hardship must be caused by unemployment in order to qualify. Special forbearances may allow more time than other forbearances for a homeowner to get up to date. They are called special because they often take place outside of the time frame of other forbearance options.
This is an oral agreement between the lender and the borrower that allows payments to be paused or reduced for three months or less. This is for short-term financial difficulty and can greatly reduce the chance of foreclosure. It can also stall the foreclosure process. If you are terminated from your place of employment or suffer a short-term illness or injury, an informal forbearance may be the simplest solution to returning to a current payment status on your loan.
As can be expected following the definition of informal forbearances, formal forbearances are in writing. They last between 3 to 6 months unless otherwise approved by HUD. The formality exists because it is a bit more risky for mortgage companies to allow a larger time frame making payments. Therefore, the agreement is formalized to ensure that borrowers understand the importance of the action.
It is important always to remember that it is in the mortgage company’s best interest to provide you with a way to get your payments current. Foreclosure generally costs the lender more than any other option, so they typically work with homeowners who are ready to get back on track. This is why it is so important to communicate financial hardships when they occur rather than procrastinating. The bank or lending company is only interested in making things work out so they do not have to foreclose the home. This information can help borrowers with the tendency to avoid communication with the mortgage company, which is often people’s first reaction in these situations.
Rent the Home
If you cannot make your mortgage payment, maybe someone else can, and that is why renting your home can be a good option. This especially true when homeowners have a much smaller mortgage payment than the rental rates in the area, and homeowners can, in some cases, put away the extra money to become financially stable.
Of course, finding an affordable alternative living space is also important. Renting your home means that you must move out of the home and pay rent elsewhere. Sometimes, it is a very good option, but it must be weighed against many variables, including the challenge of being a landlord.
Deed-in-lieu of Foreclosure
A deed-in-lieu of foreclosure is essentially a foreclosure without as many negative financial impacts. This is because a homeowner basically gives the home back to the bank. The benefit to the homeowner is they do not have the negative credit impact of a foreclosure, and the benefit to the bank is a lack of foreclosure costs. A deed-in-lieu of foreclosure will affect your credit score and remain a factor for seven years, but it is looked upon more favorably than a foreclosure. Additionally, it is not publicized, and the financial situations of the homeowners remains private.
Mortgage modifications are basically the rewriting of a loan with new terms agreed upon by both the mortgage company and the borrower. They act similarly to forbearances in that they are an agreement to pay in a different manner, but they get the account immediately up-to-date. The mortgage company does not forgive any missed payments, but the payments may be tacked on to the end of the mortgage in an effort to help the borrower catch up. Negotiations for mortgage modifications include lower interest rates and extended terms, and the bank generally provides these terms in order to reduce the risk of foreclosure.
This type of foreclosure avoidance does have a negative impact on credit scores, but it is seen as a much better alternative to foreclosure and does not have as great of an impact. Additionally, it allows the homeowner a change to get their payments up to date, so they are no longer drowning in an ever-growing debt.
If you know you are headed for financial difficulty and currently have the option to refinance your home at a lower rate or for lesser payments, do it as soon as possible. This does not negatively impact your credit and can prevent further financial hardship by lowering your monthly payment to an acceptable amount. In order to refinance, most lenders require that the borrower does not have a missed home payment in recent history. There may be closing costs, so it is worth talking to a HUD-approved mortgage counselor about options.
The refinance option highlights the importance of timeliness in a financial hardship. While it is never too late to consider your financial options, many of those options will quickly disappear if not acted upon quickly.
Bankruptcy is rarely recommended, but Chapter 13 bankruptcy can stop a foreclosure and force the bank to work with you on getting your payments up to date. This option is really for people who have serious debt problems that extend beyond the ability to pay one’s mortgage, but it can eliminate the loss of a home.
Servicemembers Civil Relief Act
Members of the military can ask for mortgage debt relief when they are called to actively serve. The SCRA protects military members from eviction and foreclosure for 9 months following active service. It is a military benefit that protects those serving their country from financial hardships that can arise during terms of deployment, and it protects service members’ families from losing their homes.
Contact Real Estate by Design Idaho
Each state has different laws regarding foreclosure and foreclosure avoidance, so working with a local real estate agent can save you thousands of dollars when trying to avoid foreclosure. William Lowery, the owner of Real Estate by Design, is experienced with all matters related to foreclosure. He has a long history of working with financially-distressed clients who need mortgage solutions to avoid foreclosure, and he can help people who have experienced foreclosure in the past to become homeowners again.
Whether it is a short sale or accessing lending companies willing to work with clients with poor credit due to mortgage solutions, Will Lowery has the knowledge and connections to make home ownership possible. Contact us today to get a professional who understands what you are going through on your side.