OK, let´s take a look at what to do and maybe what not to do if you are facing foreclosure.
First, understand that the very last thing most lenders want to do is to foreclose on a home or take the property back. Lenders are not in the business of owning real estate. Instead, they are in the business to lend money. And so, they want to know sooner rather than later if the homeowner is in financial distress and/or may need to sell the home.
Talk to an expert Thus, it is critical to understand that in the beginning of this process, a homeowner can still save money, their credit or their house if they act quickly. If this is the situation, you should immediately initiate a dialogue between yourselves and the lender so that they understand your dilemma and that you have a plan in mind that will work for you as well as ensure that the lender gets repaid. (Recommendation: you should consider having your real state agent facilitate the communication so long as they have extensive experience working with lenders on behalf of their clients.) So, with a plan, the lender should certainly be more willing to be flexible with the homeowner because not only is it easier to sell a property that is not subject to foreclosure, it is also in the lender´s best interests. Why? Because a foreclosure is public record which sends a distress signal to the market, it lowers the property´s value, and the cost to hire someone like me to market and sell the home post-foreclosure is very costly. There are fix-up costs, holding costs, closing costs and of course, the time element.
The above said, if you are unable to work out a plan with the lender and if selling the home is not in the best interest of the homeowner at this time, your agent should offer to work as a partner with you to develop a plan to maximize the value of the home. Part of this plan is to help the owner understand the market value and if there is a need for additional collateral to bridge the gap. A good agent can then help the owner access additional capital via either a second deed of trust or a line of credit to assist with cash flow. Or, the agent can help rent the property to cover the mortgage payments while the homeowner moves into a less expensive rental.
All in all, the homeowner should attempt, through the guidance and counsel of his agent, to avoid declaring bankruptcy. Avoiding a foreclosure on your credit report can salvage your ability to rebuild credit and buy another house, which makes the struggle against a possible foreclosure well worthwhile.
Please consider the following "Do's" should you find yourself in a situation where you are either falling behind on your house payments and/or facing the prospects of foreclosure:
- Sell the Property: If you can find a buyer before the house is auctioned, you can sell it and keep whatever equity still exists.
- Work out a Deal: Your lender may be willing to work with you rather than lose money at a foreclosure sale.
- File Chapter 7 Bankruptcy: If you can't get caught up in time, you will not be able to keep the house -- but you'll generally be able to delay the foreclosure sale a month or even several months. Any remaining debt to the lender will be wiped out.
- File Chapter 13 Bankruptcy: If you can afford to make future mortgage payments and the delinquent payments, too, file Chapter 13 bankruptcy. This is different than Chapter 7 in which assets are liquidated but debts are wiped clean. With Chapter 13, you keep your assets and under court supervision, you repay your debts under a three-to-five-year plan.
- Short Sale/Deed in Lieu of Foreclosure: A short sale takes place when the bank allows you to sell your property even though their mortgage won't be paid. Be careful -- the bank may allow the sale to go through, but only on the condition that you repay the deficiency. And, the lender will generally need to see that the homeowner is under severe financial distress before approving a short sale. In a deed in lieu of foreclosure, the property is signed over to the bank in exchange for the bank giving up its rights against you. Why might a bank agree to either of these? Lenders spend $30,000 or more to foreclose on a property. Most lenders will consider these options to avoid foreclosure costs.
- Walk Away From the House: Pack your things and leave. The only issue remaining is whether your lender can sue you for any deficiency still owed after the sale, and that depends on the state you live in and the type of mortgage you have. You'd be wise to speak to an attorney before taking this step.
Any sale or transfer of property has tax consequences, including a foreclosure sale or a deed in lieu of foreclosure so, consulting with an accountant is probably a good idea.
Here are two options NOT to consider. In other words, they're scams.
- Signing over the property to someone else or another company. Some companies will tell you that after the mortgage is paid current they will re-sign the property back over to you. Good luck. Rather, it is more likely that this company will pull out all of the equity, not make payments, and then allow the property to be foreclosed. And, you will not be able to save the property from a future foreclosure because the property is not in your name.
- A high interest second mortgage. When a property has equity, there are companies which will provide you a second mortgage in an amount as high as 70+% of the equity available. The interest rate could be upwards of 18% with very high fees. The company is hoping that you will spend the cash and then default which allows them to take the property from you.
When facing foreclosure, you have options, but you need to avoid the scams and act quickly if you want to have the best outcome. Delaying only makes foreclosure inevitable.