How Do Homeowners Avoid Foreclosure?

Every month I have the pleasure of hosting a Foreclosure Buying 101 Webinar with RealtyTrac website demo for new and prospective RealtyTrac members.

The most enlightening portion of the webinar for me is the Q&A at the end. We always get great questions from the attendees that keep me on my toes. And I’m sure that for almost every attendee who asks a question there are hundreds of other folks who have the same question, so I’m going to address some questions from recent webinars in a series of posts.

View the most recent recording of the Foreclosure Buying 101 & RealtyTrac Website Demo webinar.

The first question I’ll address was from a webinar on May 3, 2012:

What options do homeowners have to avoid foreclosure after they start the foreclosure process?

It was somewhat of a surprising question given that most of the attendees are not distressed homeowners facing foreclosure but instead prospective buyers and investors looking to possibly purchase a foreclosure property. But on the other hand, it’s wise for such buyers and investors to put themselves in the shoes of distressed homeowners before approaching those homeowners with an offer to purchase their pre-foreclosure property.

Homeowners who have started the foreclosure process have many options to avoid foreclosure, but they basically fall into two categories:

1. Stay in the home and keep making monthly mortgage payments. This might play out in a variety of ways, from the homeowner somehow coming up with the means to start making their current mortgage payments, to a refinancing or loan modification that lowers their monthly payments to a manageable level. There are numerous loan modification and refinancing programs available, most prominently the federal Home Affordable Modification Program (HAMP).

The recent mortgage settlement between 49 state attorneys general and five major lenders requires those lenders to pony up $17 billion in loan modifications that include reductions in the principal balance. Borrowers with loans owned by any of these lenders should check with their lenders to see if they can land one of these loan modifications.

2. Sell the home and walk away from the mortgage debt. In today’s market, this type of pre-foreclosure sale would typically be a short sale, in which the homeowner sells the property for less than what is owed on the mortgage. A short sale should have less of a negative impact on the borrower’s credit rating than a foreclosure would, but of course they still end up losing the property.

There are some other sort of in-between options for distressed homeowners, including a deed-in-lieu of foreclosure, in which the homeowner voluntarily deeds the property back to the foreclosing lender without the lender having to go through the foreclosure process. Another such in-between option is a deed-for-lease arrangement, where the homeowner again deeds the property to the lender, but the lender allows the homeowner to stay in the property as a paying tenant.

In the next post, I’ll cover why a property goes to a public foreclosure auction and how to handle any current tenants who may still be living in the property purchased at the auction.

Sign up for a RealtyTrac free trial for full access to pre-foreclosure, auction and bank-owned homes nationwide.

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