Wednesday, October 20, 2010

Facing Foreclosure?....7 Options To Consider


Here is some information that many of you may find useful when trying to determine your options if you find yourself or a friend/family member facing the challenge of losing your home.

According to RealtyTrac.com, 1 out of 84 homeowners received at least 1 foreclosure filing during the first half of 2009, and for the 4th straight month, more than 300,000 foreclosure filings were reported nationwide.

The FDIC reports that the 2 most common reasons for foreclosures are job loss and health crisis. Despite the media seemingly blaming a subprime loan program that affected 3-5% of the population for our foreclosure woes, the reality is that the combination of job loss and dropping home values have created a perfect storm of financial disasters for many normal families. Now with a slower real estate market translating into falling home values, more homeowners who opted for adjustable rate mortgages are finding that their mortgage rate is rising as their home value is lowering. Therefore, unfortunately, the foreclosure crisis in America is likely to continue.

In years past, if you lost your job, couldn’t pay medical bills, or moved out of state, you had a decent chance of selling your home for a profit, or at least breaking even. Now, many people are tens of thousands of dollars upside down on their loan and are unable to downsize to a smaller dwelling without suffering a foreclosure.

According to homebuying.com, a foreclosure will damage a consumer’s credit score, lowering it on average 200-300 points and making it difficult to get another home for 5-7 years. Bad things happen to good people, and the purpose of this article is to provide people with options available to them during the foreclosure process:

Option 1- Bring loan current. According to the FDIC, most homeowners in foreclosure have no savings and no available credit. And since the number one reason for foreclosure is due to job loss, there may be no way for the homeowner to catch up the loan. However, if you as a homeowner struggling with a foreclosure have the reasonable expectation of income coming in sometime in the near future, it may benefit you to talk to an extended family member or friend about a short term loan.

• Option 2- Loan modifications. According to a Freddie Mac / Roper Poll, most homeowners fail to contact their lender because they are embarrassed, don’t believe the lender can help, and/or believe it would cause them to lose their home more quickly. However, this option may be a viable. Loan modifications occur when the bank agrees to reduce principal, interest, and/or payments. Unless you have experience with the Loss Mitigation Dept. at banks, I would recommend working with a legitimate, experienced loan modification company who can prepare an effective argument for the banks because loan modifications do not have a high success rate. According to the Office of Comptroller Mortgage Metrics report of April 2009, “…In 2008, only 41.85 percent of all modifications reduced monthly principal and interest payments for homeowners. For delinquent borrowers - - a loan modification resulted in an INCREASED or EQUAL payment amount 58.15% of the time!!” As stated earlier, the number one reason for people going into foreclosure is due to job loss. If no income is coming in from a traditional job, then there is little chance that a mortgage company will reduce your loan principle, interest rates, or payment.

Option 3 – Forbearance. Forbearances are when a mortgage company allows you to delay your payments or spread your missed payments over the next specified number of months until you are caught up. Again, if you have a reasonable expectation of revenue coming into your household within a certain number of months, then this may be a solution for you. However, keep in mind that until your past amounts are brought current, you will have a negative mark against your credit, even during months when you are paying more than your requirement! Also, some programs may allow the banks to immediately foreclose on you if you fall behind on payments again. Read the agreement you receive from the bank diligently and weigh the pros and cons carefully.

• Option 4- Deed in Lieu of Foreclosure. According to Nolo.com, “with a deed in lieu of foreclosure, you give your home to the lender (the “deed”) in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings.” This option, if accepted by the bank, is a quick and easy way to walk away from the house, doesn’t require a sale, and may look better on a credit report than other options. Also, some banks may accept this option as it is less expensive than the foreclosure process. This process will not work if you have multiple liens on the house. Also, banks are in the business of collecting cash, not property. And the banks are holding onto more property than they would like so this options very seldom works. Plus, in many mortgage agreements, it is stated that if the buyer goes into default, the bank will only take the property back through foreclosure.

• Option 5 – Bankruptcy. This option is widely misunderstood and possibly the worst option for homeowners. Bankruptcy will only pause a foreclosure, not eliminate it. As stated earlier, most mortgage agreements state that if the property goes into default, the bank will take back the property through foreclosure. Then, you will have both a bankruptcy and foreclosure on your credit history for the next 10 years! Plus, you may still be required to work out a repayment plan for the house. Seek legal counseling prior to deciding on a bankruptcy.

• Option 6 – Foreclosure. Do nothing and let the bank take the house back. The foreclosure process will negatively impact your credit by dropping your score 200-300 points and preventing you from purchasing a house again for another 5-7 months. Plus, you may be sued for deficiencies by the bank for the difference between what the house sold for at auction and what you owed. Or you may receive a 1099 from the bank, stating that the difference is income and you can be taxed upon it.

• Option 7- Short Sale. A short sale occurs when a third party negotiates with the mortgage company to accept a discount on what is owned and release their interest in a property in exchange for a cash payment. The seller is not allowed to financially benefit from the transaction. For a short sale scenario, it is better to utilize the services of a Real Estate Investor rather than a Realtor. First, an investor has more experience with these types of creative transactions than a Realtor. Second, the investor will agree to purchase the house, providing the bank with a signed Purchase Agreement. This Purchase Agreement increases the likelihood of a bank accepting a discount. Most Realtors try to negotiate with the bank and then find a buyer after the negotiations. This strategy leads to a very low success rate. Some of the drawbacks of a short sale are similar to a foreclosure, as your credit score will be negatively impacted but you may be able to purchase a house again after 24 months.

Also, you may be sued and taxed as well, although if you have a knowledgeable investor working your short sale, he or she can negotiate with the bank a ‘satisfaction of the loan’ result, meaning that the accepted short sale would satisfy the loan and no remedies would be needed.

Doing nothing or declaring bankruptcy is probably your worst option. Homeowners facing foreclosure today are going through enough misery and stress and deserve options other than these.

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