For Sellers--Avoiding Foreclosure


Illness, death, and divorce are crises that some families must face. So is the loss of one’s home through foreclosure.

Home ownership is one of the cornerstones of the American way of life which is cherished by most. To lose it for any reason can be devastating, but to lose it through foreclosure can also be demeaning and embarrassing. It also wreaks havoc with one’s credit rating for a long time—for as little as 5 years or as long as 12 years, making it difficult to make purchases on credit, even to rent an apartment or house. It can also affect one’s ability to get a job or insurance. Thus for most people, avoiding foreclosure is the name of the game.

The first step to avoiding foreclosure is to recognize the early warning signs that you are headed toward foreclosure. Then you can take steps to avoid it and search for alternatives. Excessive debt is the number one cause of financial collapse and foreclosure.

Early Warning Signs of Foreclosure 

• Credit card debt out of control (maxed out cards and paying only the minimum amount due).
• Paying for necessities with credit cards (i.e. groceries, utilities, etc.).
• Cannot meet basic monthly financial obligations (e.g. choosing which bills to pay).
• Borrowing from friends and family.


Some Causes of Foreclosure

• Loss of employment or reduction in hours or wages.
• Major illness which can cause loss of work and an increase in health expenses
• Divorce, separation or other traumatic family or personal situations.
• Death of a spouse or significant other.
• Cannot pay the new adjusted Payment on the ARM mortgage loan.
• Major unbudgeted maintenance expense.

Strategies to Avoid Foreclosure

• Be proactive about the problem when the first warning signs appear. Not only does this reduce the stress of not knowing what is going to happen but it makes it easier for creditors to work out a plan. Time is the enemy—and the sooner you deal with the problem the better. Delaying only makes the situation more critical and more difficult to solve.

• Contact your lender when you become aware that you have a problem. The last thing that a lender wants is to foreclose on the property. Financial institutions lose a significant amount of money by foreclosing on a property, often more than $50,000. It is a lose-lose situation for both the lender and the homeowner. Be honest and forthright in your discussions with the lender and be prepared to discuss the reasons for your problems.

• Read the mail. Not knowing does not solve the problem it just delays the final result and increases the pain. By not reading the mail, a person avoids the opportunity to get help before it is too late.

• Contact a HUD-approved credit counselor or call a Realtor for advice. Call 800-569-4287 to find a nearby counselor or go to www.hud.gov.

• Prioritize your spending by paying for the necessities of life first. Always pay the house payment and health insurance first.

• Look for ways to generate cash. Sell those items that have value but are not used or needed, or seek a part time job to get through the crisis. Not only does this reduce the emotional and financial stress but it provides evidence to the lender that the borrower is proactively seeking a way to remedy a bad situation.

• Don’t get scammed by a private “foreclosure prevention specialist,” instead go to www.hud.gov, to obtain valid information about foreclosure prevention.

• Make an appointment with a Realtor to discuss the problem and to get their advice.

Alternatives to Foreclosure for Homeowners

Bring your loan current and maintain regular payments in a timely manner. This may be done in a number of ways. 


 1.  Work out a repayment plan with your lender

      a. Forbearance—under this plan, the lender may allow the borrower to skip a payment or make a partial payment if the borrower can suggest a reasonable plan to catch up on the amount in arrears. This could work if a person has temporarily been out of work or has experienced an unusual expense such as sickness or an emergency. However, homeowners should be advised that just because a lender has done this once doesn’t mean that the lender will do it again in the future. 

      b. Reinstatement—similar to forbearance, but under this plan the borrower agrees to make a lump sum payment in the future to bring the mortgage “up to date.” This could be made possible by tax refunds, future bonuses, anticipated increase in family income, etc. The difference here is that it’s a lump sum payment. 

      c. Repayment plan—if the above two options won’t work, the lender may allow the borrower to catch up on what is owed by increasing the monthly payments until the missed payments are brought current. 

  2. Refinance your home with better terms and rates. However, this will work only if your home will appraise in the current housing market. In many areas, homes are worth less than what the homeowners paid for them. 

  3. Modify your current loan with your Lender

       a. Convert your mortgage to a fixed rate mortgage at a lower interest rate and extending the years of the mortgage to reduce the monthly payments. 

       b. Giving more years to papy off the mortgage and adding the misses payments to the balance of the mortgage. 

       c. Forgiving part of the loan to make the payment affordable. 

  4. Rent your home and make the mortgage payments to your Lender.
 
  5. Borrow money from a relative or friend to bring your payments current. 

  6. Sell your home and pay off the mortgage. This works if the value of the home is greater than the loan amount.


• Deed in Lieu of Foreclosuresometimes referred to as “Deed for Keys.” As with foreclosure this plan does affect a person’s credit rating, but not as negatively as foreclosure. In order to enact this plan the loan amount must be lower than the anticipated sales price. Many lenders require a 20% differential to make this work.


• Cash for Keysthis plan works when there is equity in the property and the lender and the homeowner agree to exchange cash from the lender for the keys to the property. The borrower walks away with cash and the lender owns a property that has enough equity to cover the cost. The advantage of this plan is that it is fast and avoids considerable expenses and red tape.


• Short Salean alternative for properties in which the mortgage is greater than the value of the property. In this scenario the financial institution may be willing to forgive some of the mortgage to make a sale possible in order to avoid foreclosure. This process may result in a negative impact on the borrower’s credit rating though not as much as a foreclosure.