Foreclosure is a choice made by uninformed and sometimes irresponsible homeowners who have simply given up. No matter how frustrated you are or how grim the situation has become, foreclosure is not the answer.
There are a number of ways to avoid foreclosure:
1) Loan Modification
What is a Loan Modification?
A loan modification is an adjustment to the original loan terms agreed upon by the lender and the borrower. There are three areas that can be adjusted:
1 Interest rate
2. Length of the loan
3. Principal owed (this is the least likely to occur)
Loan Modification Requirements
You will need to provide extensive documentation to prove why you need a modification. Your bank will go through a credit check, run an income vs. expenses analysis, and then will do an appraisal on your home.
Back in 2008, the government launched some programs to try and assist struggling home owners by reducing the interest rates of their current mortgages. The most popular one was HAMP (Home Affordable Modification Program), many called it the “Obama plan.”
By most accounts, the loan modification programs have been an absolute failure. The criteria to qualify for one of these programs continues to change and most borrowers who have attempted them have been denied.
And those who were approved many times did not get approved for terms that would allow them to keep their home long term. That is why the re-default rate is over 50% within 12 months after a loan modification.
Our position on Loan Modifications has never changed:
If your financial hardship is temporary and the savings from the loan modification will enable you to keep your home, then this is a viable option.
Unfortunately, we have found that the slight savings that a loan modification may provide is usually not enough to sustain the home.
With taxes, condo fees, and maintenance of New England homes on the rise, we encourage home owners to look for a more long-term option when considering a loan modification.
What to Watch Out For: Trial modifications that entice you into paying 3 straight payments and then once you do, they deny you for a permanent modification and begin foreclosure proceedings. Another thing to watch for is when you are in a month over month holding pattern and keep getting told that your file is being reviewed only to receive a foreclosure notice shortly afterwards.
Unlike a loan modification, which tries to reconfigure your current loan, refinancing provides for an entirely new loan. If your home is not upside down, meaning it is worth more than you owe on it, then refinancing may be an option. On the other hand, if it upside down, where you owe more on it than it is worth, then refinancing most likely is not possible. The only chance to refinance when you are upside down on your home is through the Home Affordable Modification Program (HARP). HARP was rolled out by the current administration in April of 2009 and may allow you to refinance your home in order to lower your mortgage payment even if you are upside down in the home. The Obama administration recently loosened the requirements to get into HARP in an effort to assist more underwater homeowners.
- Your loan must be guaranteed (owned) by Fannie Mae or Freddie Mac and have been since prior to May 31st 2009.
- You must be current on your existing mortgage and current for the prior 6 straight months
- You can only have 1 late payment on your mortgage in the last 12 months
This program is offered by many lenders but just like loan modifications there has been a ton of overpromise. The root of the problem is that lenders do not want to take on loans that are so far underwater even if the borrowers have great credit and are current. Reason being statistics prove that underwater homes are more likely to go into default at some point when compared to homes with equity.
Read more about Why HARP Won’t Work.
HARP can be a long term solution if a homeowner can get into a lower payment they can afford. However distressed homeowners need to remember that this does not solve the fact that the home is underwater. In addition, it pushes your loan out 30 years again. Recently Douglas Duncan, chief economist at Fannie Mae, commented on HARP, “This program ignores some of the reality facing homeowners. A refinance on a 30 year mortgage generally extends a mortgage out again by 30 years. For underwater homeowners trying to get out of their mortgage this extension does not appear to be relief,” said Duncan.
What to Watch Out for: Be on the look out for loan modification and refinance scams. Any time the media shines the light on some of these programs, scam artists try to take advantage of distressed home owners. Never pay any up front fees of any kind or any fees throughout the refinance process!
What Is Forbearance?
Forbearance is a special agreement between the lender and the borrower to delay a foreclosure.
A forbearance agreement allows the lender to delay their right to exercise foreclosure if the borrower can catch up on his/her payments in a certain amount of time.
Is Forebearance Right for You?
Forbearance should only be used for a temporary financial hardship. If someone has a more long term hardship such as unemployment or underemployment then this is not a good option. The lender will not agree to forbearance unless the terms are favorable to them which may include a lump sum payment or tacking on any missed payment to the back end of your loan.
What to Watch Out for: Trying to obtain forbearance because you can no longer afford your home and you are upside down is a bad idea and only makes you further upside down.
Remember all of those payments that you don’t make get ADDED onto the end of your loan.
What is Bankruptcy?
Bankruptcy is the legal status of an insolvent person or business that cannot repay debts owed to creditors.
Is Bankruptcy Right for You?
Bankruptcy does not stop a foreclosure forever. But it will delay it and it eliminates the need to worry about the deficiency balance on your first or second mortgage.
As outlined in our How to Avoid Bankruptcy section, bankruptcy can immediately put the brakes on any foreclosure.
Bankruptcy is a federal right so it is not specific to any state.
Income and assets guidelines dictate if an individual or a household would qualify for it. If a foreclosure date does not allow for enough time to find another place to live, there are additional liens on the property that would prevent the home to be sold on the open market, or you are concerned that the bank will come after you for the difference, than a bankruptcy may make sense.
What to Watch Out For: Bankruptcy has the worst possible effect on your credit and should only be used when absolutely needed.
5) Deed in Lieu of Foreclosure
What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure occurs when a borrower conveys all interest in their property over to the lender to satisfy the loan that is in default and avoid foreclosure proceedings.
Is Deed in Lieu of Foreclosure Right for You?
When you decide to do a deed in lieu of foreclosure, it’s like opting for a “voluntary foreclosure,” since you are essentially handing over the property to the bank without having to go through the actual foreclosure process. While a deed in lieu is easier than foreclosure, the only party who will reap the benefits of this program is the bank. The credit implications and impact on your ability to borrow money in the future are identical to a foreclosure. It is not looked upon favorably.
What Are The Deed in Lieu of Foreclosure Requirements?
Like many foreclosure alternatives, there is a long list of requirements that prevents many people from qualifying for a deed in lieu of foreclosure.
For example, other liens and second mortgages may limit this option, and a true hardship must exist. Since the bank is not in the business of owning properties they will only consider this option if the loan is in default and they truly believe they will have to foreclose if they do not agree to it.
Lenders prefer short sales over a deed in lieu because with a short sale they don’t have to take over the property. Even under the Treasury’s HAFA program you are required to first attempt a short sale and if that fails after 120 days then you can apply for a deed in lieu of foreclosure.
What to Watch Out for: A deed in lieu does not automatically forgive the deficiency balance on the loan. Just like with a short sale you need to be sure the deficiency balance is waived on all mortgages. The approval needs to specifically state that the balance is waived and it needs to say something like “bank and investor agree to waive the remaining balance due on the above referenced loan and release the borrower/s from further obligation therein, and waive all rights to pursue further judgment or deficiency.”
6) Short Sale
What Is a Short Sale?
A short sale is the process of selling a home through which a mortgage company agrees to settle for less than they are owed.
Any unpaid balance owed to the creditors is known as the deficiency which in most cases is forgiven.
McGeough Lamacchia Opinion: As highlighted in Why Do a Short Sale, the 4 reasons clients opt for a short sale versus a foreclosure are debt forgiveness, credit impact, buying a home again, and selling with dignity.
Each benefit clearly outlines why more and more homeowners are choosing to do a short sale.
What to Watch Out For: Be sure the deficiency balance is waived on all mortgages.
The short sale approval needs to specifically state that the deficiency balance is waived in terms such as “bank and investor agree to waive the remaining balance due on the above referenced loan and release the borrower/s from further obligation therein, and waive all rights to pursue further judgment or deficiency.”
Every one of the above options requires a distressed homeowner to make an effort to do the right thing.
We have found that many distressed homeowners will attempt some of the above methods such as loan modification, forbearance, and then leave a short sale for last.
Then once the short sale is complete most of them wish they had done the short sale from the beginning.
When I met with John McGeough on that gloomy, rainy day, I felt just as gloomy as the day; I had nowhere else to turn. This was my last effort to sell the two family house that I’d hoped to keep for my retirement plans. John was so kind, and he thoroughly explained my options. Going through the short sale was very hard, but his staff was so wonderful, helping me over come every hurdle that was in my way. I really don’t know what I would have done if it wasn’t for all the terrific people he has on his team to get me through it. Katie and Angela were exceptional. It was the best experience I had ever had with any realty company, hands down. I will recommend McGeough Lamacchia Realty to everyone I know and even those I don’t know, they are THE BEST!!! Try them out and see for yourself, you won’t be disappointed, I promise! Sincerely,- Lauren M., New Bedford, Massachusetts