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The sharp rise in foreclosure activity in recent months does not paint a pretty picture for distressed borrowers: Foreclosure activity was up 112 percent in the first quarter of 2008, according to RealtyTrac.
Step one is to contact your lender as soon as you know you can’t make a payment. The faster you move the more options you’ll have to fix your financial future. Borrowers may have the option of renegotiating their loan with the lender. Try to negotiate a plan that will enable the loan to be back in service. Lenders don’t want the property back; they want to keep their loan portfolio full of performing loans — not defaulting loans. Lenders say that the sooner they hear from a delinquent borrower in trouble, the easier it is to negotiate a solution.
Prior to a foreclosure sale, borrowers have the right to reinstate a delinquent loan. The reinstatement option gives homeowners the opportunity to make up back payments plus any incidental charges incurred by the bank such as filing fees, trustee fees and legal expenses. Paying off the reinstatement amount will cancel the foreclosure and enable the homeowner to continue to live in the home as if no default occurred. For many delinquent borrowers, however, reinstatement is not an option because they are deep in debt and cannot make up back payments, plus other expenses. Consult with a real estate attorney or an experienced real estate broker because reinstatement laws vary from state to state.
One of the most overlooked foreclosure options a borrower has is forbearance. Forbearance is the postponement for a limited time of a portion or all of the payments on a loan in jeopardy of foreclosure. Partial or full payment waivers had their origins in the Great Depression. A lender expects that during the moratorium period the borrower can solve the problems be securing a new job, selling the property or finding some other acceptable solution.
Depending on your lender, you may be able to restructure your loan. For example, delinquent mortgage payments may be added to the backend of the borrower’s scheduled payments or the borrower could be given more time to bring the late payment current. Some mortgage companies are able to arrange a repayment plan based on your current financial situation. You may qualify for this option if you recently lost your job. Call your lender and inquire if you meet the requirements for forbearance.
To redeem a loan, the borrower must pay off the loan in full. Borrowers may accomplish this by refinancing (with a family member cosigning perhaps) or by a friend or relative bailing out the borrower in exchange for equity or some other financial arrangement. Again, redemption rights — like reinstatement rights — vary from state to state. Most states permit redemption up to the foreclosure sale.
For owners who don’t care to save the property, or who have no other choice than to let the property go, selling the property may be a smart choice. If you have enough equity in the house to allow you to pay off the mortgage in full, then a sale is usually your best option. This option preserves your equity and what’s left of your credit score. Selling also leaves you in a much better financial position should you want to buy another home in the future. Even if you don’t have equity, you may be able to arrange a short sale, where the bank agrees to forgive the mortgage debt for less than the total amount owed on the mortgage if you sell the property to a third party. The advantage to the lender is that it does not have to deal with costly foreclosure proceedings.
Learn more about short sales.
For homeowners who have no opportunity to reinstate, redeem or even sell their property and just want out of the property, a deed-in-lieu of foreclosure may be viable option. Essentially, a deed-in-lieu of foreclosure is a transfer of title from a borrower to the lender, which the lender accepts as full satisfaction of the mortgage debt. With this option, you as a borrower voluntarily “give back” your property to the mortgage company. You won’t save the house, but you do avoid the trauma of foreclosure and reduce the negative impact on your credit.
Filing bankruptcy is not a permanent cure for foreclosure, but it can temporarily halt the foreclosure process. Once a borrower in default files a petition for bankruptcy, foreclosure proceedings stop immediately. A homeowner, however, must hire an attorney in order to file bankruptcy, which can be expensive. Before considering this option, a homeowner should consult a real estate attorney.
Learn more about foreclosure and bankruptcy.
Allowing the foreclosure to proceed to the auction is generally the worst choice. By doing nothing, homeowners will lose their home and any equity they have earned. Plus they will damage their credit at the same time. Moreover, some states allow lenders to go after borrowers in court for any deficit between what the house eventually sells for and what the homeowner owes. This is called a deficiency judgment. Unfortunately, many homeowners chose this option, putting their heads in the sand and hoping they’ll win the lottery and avoid foreclosure.
Learn more about the foreclosure process.