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Foreclosure Alternatives: Home Retention, Home Forfeiture and Bankruptcy. Everything You Need to Know!

Lambros Politis - Wednesday, March 19, 2014

Roughly ten million Americans are underwater on their mortgages. Millions are struggling to make their monthly mortgage payments, whether they are underwater or not, because of wage cuts or unemployment. Around 4% of borrowers are already far behind: 60 or more days delinquent on their mortgages. It is frightening to be in any of these situations. It is easy to feel that you are on the road to foreclosure, and that you don’t have any options.

Too many struggling homeowners don’t realize that there are many ways that you can get off that foreclosure road - even if you have already been served a foreclosure notice by your lender.

Strategies to avoid foreclosure can be classified as “home-retention,” where the goal is to find a way to afford to keep the home, and “home-forfeiture,” where the aim is to get out of home ownership and put that bad mortgage debt behind you. There are advantages and disadvantages to both home-retention and home-forfeiture strategies, so what works best for one homeowner may not be the right solution for another. It is important to be informed about all of your options, so you can act as early as possible, and have the best chance of avoiding foreclosure and everything that goes with it: the financial damage, the stigma, and the long-term effects on your credit rating and ability to get a new mortgage.

Here is a primer on home retention and home forfeiture, with examples and their pros and cons. We will also briefly discuss bankruptcy, since it is another option for avoiding foreclosure.

Home retention:

Home retention means keeping the home: finding a way to be able to afford it. This option may be preferable for parents with young families, who don’t want to disrupt their children with a move, or for people who have an emotional attachment or other reason for wanting to keep the property.

Renting out the property:

This may be an option if the home will rent out for more than what the monthly mortgage payments are, and if the owners can find cheaper rental accommodation to live in. Costs beyond the monthly mortgage payments must be factored in, such as covering the full mortgage if the home is vacant, and extra repair bills. Unfortunately, in today’s economic climate, low rents mean that this option won’t work for the majority struggling homeowners.

Refinance:

This means replacing the existing mortgage with a new loan. The borrower must qualify for refinancing as if for a new mortgage, so refinancing is not usually available to borrowers who are underwater with their mortgages or to those who are already struggling to make mortgage payments. However, it can be an option early on to a vigilant homeowner, who is aware that they may have trouble in the future to continue to afford their mortgage.

Loan Modification:

A loan modification is a permanent adjustment made to one or more of the terms of a borrower’s existing loan. However, many loan modifications fail because borrowers cannot afford the new payments (which, often, are no lower than the old payments). Loan modifications should be approached with caution, because the application process may take many months. If the borrower is not approved, they will have lost valuable time that they could have used trying out other options.

Forbearance/Repayment Plan:

Forbearance is a temporary suspension or reduction of loan payments. It is usually granted only if the hardship causing the missed payments is temporary, e.g. due to a medical condition or a natural disaster, and if there were no missed mortgage payments prior. At the end of the forbearance period (usually three to twelve months) the borrower must make up all of the missed payments, either by paying them out or through a repayment plan.

Home forfeiture:

Home forfeiture means giving up the home. This can be a very attractive option to people who just want to cut their losses and leave their bad investment behind them. It allows for a fresh new start.

Deed in Lieu:

A Deed in Lieu of Foreclosure is also known as voluntary foreclosure: the homeowner voluntarily transfers the deed of the property to the lender. Its only value over foreclosure is that it saves the stress of having to go through the whole foreclosure process, and that the hit to the borrower’s credit score may be less than that of a foreclosure.

Short Sale:

A short sale means giving up the home, but without the stigma and without as much of a hit to the credit score as foreclosure brings. Rather than doing nothing and waiting for your lender to take action, choosing to do a short sale means working with your lender so that you come to a decision together about how to share the losses on a bad investment. Millions of Americans have used a short sale to get out of a mortgage that they could not afford, and walk away from their home completely free of that old mortgage debt.

Bankruptcy:

Bankruptcy is another option for avoiding foreclosure. This is a complicated option, and difficult to explain briefly, because there are several types of bankruptcy (the most common ones for individuals are Chapter 7 and Chapter 13. Either of those options can allow for either keeping the family home or giving up the family home.

Although many people fear the idea of bankruptcy, it can actually be a very good option in certain situations - especially if the homeowner is carrying a lot of other debt in addition to their mortgage(s). However, since everyone’s situation is unique and each person’s goals are different, you would do best to discuss the options around bankruptcy with a bankruptcy attorney who can give you advice based upon your own personal circumstances.

Take Action:

Doing nothing - not making mortgage payments, not making up missed payments, and not communicating with your lender - will lead to foreclosure. To some homeowners, this might seem a good option because they don’t have to do anything, and they can live in the home for free until the day that the sheriff finally boots them out.

However, to most people, this is the most stressful option of all: receiving notices and fielding phone calls from the lender, dealing with the stigma and judgment that surround foreclosure, dealing with the uncertainty of how long they may stay in the home - not to mention the long-term effects of foreclosure (damage to credit rating, and challenges in trying to get a new mortgage).

In most cases, it is possible to avoid foreclosure. Even if you are already delinquent, or have been threatened with foreclosure by your lender... even if you have already been issued a Notice of Trustee Sale (NOTS), in most cases one of the strategies listed above will work for you, so you can avoid foreclosure. The two important things to know are:

  • you must take it upon yourself to be informed about all of your options (a professional team that specializes in debt settlement and foreclosure avoidance can help here)
  • you should act as early as possible - the sooner you take action, the more options you will have as far as home retention or home forfeiture, and the better your chance of success will be.

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At Seattle Short Sales, we know that being in debt is about so much more than just numbers. We understand the pain that debt causes, and the personal toll it takes on families and on relationships. We are here first to listen - because we know that everyone's situation is different. Once we understand your unique circumstances and your individual needs, our team of attorneys and financial professionals will help you find the best and quickest solution to your personal debt problems. For a free, no-obligation consultation, tell us about your situation or call us directly at 1-800-603-3525. Lambros Politis can also be found on Google +.


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