If you are in potential danger of having your home repossessed by your lender through foreclosure, then you are not alone. Over 1 million U.S. homes have been retaken by lenders since 2008, and foreclosure activity is believed to be picking up in 2012. As homeowners begin to face the reality of losing their homes, many are left wondering about what their options are when it comes to the foreclosure process. We can simplify the options a great deal to help you see the bigger picture.
Before we get there, we should get on the same page as far as defining the term “foreclosure”. The basic definition is the failure of the homeowner/borrower from fulling the payment obligation to the lender. By defaulting on the loan terms, it allows the lender to declare the terms of the contract breached, and provides an avenue for the lender to acquire the home that served as security for the money borrowed to purchase the home originally. In simpler terms, the lender will try to recoup their loss from the loan default by taking ownership of the home or property. Foreclosure itself is the process by which lenders can acquire property from the original owner.Foreclosure sale is the conclusion of the foreclosure process, and when the property ownership has officially transferred from original owner to new (lender).
Now that we’ve defined the term, we can move onto the options for homeowners facing the foreclosure process. The options boil down to whether: 1) You want to sell your home, or 2) You want to keep your home.
1. You want to sell your home
Selling your home is a viable option should your only other available solution is foreclosure. If you find yourself in the enviable position of having equity in your home, then this information is NOT for you. These are options for homeowners who are not only facing financial hardship, but also underwater on the value of their home.
Short Sale
In a short sale, the lender and the homeowner agree to sell the home at a price that is less than the remaining value of the loan. Basically, this means the bank accepts a payoff that is less than the amount you owe. The seller/homeowner will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but the basic procedure is similar from bank to bank. You can find a basic outline for the package in the resource section of this article.
Deed in Lieu of Foreclosure
You can avoid the foreclosure process completely in another way, by signing the deed of your property over to the lender. In this case, you are in basic terms giving up ownership of your home. Outside of losing your property asset (which is certainly a not an easy financial decision to make), the advantageous part of this option is that you can potentially walk away from a negative equity investment – a property that is “upside down” on its market value when compared against the money owed on the remainder of the loan. Or simply, you owe more than your property is worth.
There are requirements for a deed in lieu of foreclosure agreement with your bank. You can find more about the requirements in the resource section of this article. Depending upon your loan type, when you complete a deed in lieu of foreclosure, up to $3,000 may be available for your relocation expenses. You may also be eligible for up to $6,000 to help settle obligations such as your home equity loan or line of credit.
A deed in lieu effectively ends your home loan, and in some cases means you are not required to pay any remaining amount owed on your loan (also known as the deficiency). The important point in bold is an agreement that should be hammered out directly with your bank.
In both a short sale and deed in lieu of foreclosure, your credit score will be negatively affected. The degree of which, however, may be less than having a foreclosure judgment listed on your credit report. According to Fair Isaac, the organization that determines a consumer’s FICO score (Fair Isaac Corporation), while credit scores will be affected based on an individual basis, in general the negative change will average around an 85 to 160 point drop. It can lower as much as 300 points depending on financial circumstances – so homeowners should prepare themselves accordingly. The negative mark will stay on your credit report for up to seven years.
However, the silver lining for both a short sale and deed in lieu is that you can begin the credit recovery process sooner than if you suffer a foreclosure judgment. The foreclosure process can be extended over months, and sometimes over a year depending on proceedings. Your credit score will remain in its lower state until the foreclosure proceedings finalize.
Ideally, once you have completed your short sale or deed in lieu of foreclosure, you stay up to date on your credit score by checking it on a timely basis. There are a number of credit score companies that you can use. Simply search “what is my credit score” on Google, and you’ll understand what I mean.
2. You want to keep your home
The path to keeping your home in a foreclosure situation may be more complex, but there are a great number of option for homeowners. In ALL CASES, you will be required to work hand-in-hand with your lender or bank to figure out the details of agreement. These approved methods of maintaining home ownership rely, in some instances, on the goodwill of the lender, or assistance from the federal government to help pave the way to modification of the original loan.
Homeowner/Lender Options
Real Estate Forbearance
You either make reduced mortgage payments or no payments for a period of time (generally three to 12 months) to give you a chance to get back on your feet during a temporary hardship. The missed payments are then repaid through a repayment plan where you would resume making your normal monthly payments plus an additional amount over time. To be clear, real estate forbearance DOES NOT dismiss the missed payments from your original loan. In essence, it is a temporary delay. Once the forbearance period is over, the same rules apply should the homeowner experience another financial hardship. If you default on your loan payments again, you will be subject to the bank’s right to foreclose on your home.
Refinance
If you’re having difficulty making your home loan payments, refinancing your mortgage may be an option. It may make your monthly mortgage payments more affordable by lowering your interest rate or moving you from an adjustable-rate mortgage into a fixed rate loan. Sometimes, depending on your circumstances, both are possible. Homeowners should be aware that refinancing your original loan may have more stringent requirements from your bank. Typically, refinancing options are for homeowners who are deemed credit-worthy by creditors. Late payments and loan payment delinquency may negatively affect your chances of refinancing. However, this does not mean it is impossible to do so. Check in with your bank on your viability, and if at all possible, be proactive in communicating your refinance request before you miss a payment. Mortgage refinance offers are available from a number of lenders, make sure you explore all your options should you decide this option is right for you.
Loan Modification Options – Federal Assistance
Each option listed below is a program provided by the federal government and has separate eligibility requirements based on differing criteria.
Home Affordable Refinance Program (HARP) HARP modifications are for homeowners that are CURRENT with their payments but are experiencing financial hardship.
HOPE for Homeowners Program HOPE modifications are for homeowners having difficulty making payments, at risk of foreclosure, but can afford a new loan insured by HUD (Housing and Urban Development).
Home Affordable Unemployment Program This loan modification program are for homeowners experiencing unemployment, and potentially qualify for AT LEAST three months of suspended payments while new employment is sought.
Home Affordable Modification Program (HAMP) HAMP may be a loan modification option for homeowners with an FHA loan.
Home Affordable Modification Program Military Modification As the name suggests, this loan modification program offers assistance for our military. It also includes a provision to potentially forgive principle debt.
FHA Home Affordable Modification Program This is another loan modification program for loans insured by the FHA.
Hardest Hit Fund The federal government created a program to help homeowners in states that have been most affected by housing price declines and the recession. You MUST be a homeowner facing foreclosure in an eligible state.
There were hopeful signs of a recovery in 2011 as foreclosure activity slowed. But the trends are pointing to a significant increase in new foreclosure filings in 2012. “First quarter metro foreclosure trends were a mixed bag,” said Brandon Moore, chief executive officer of RealtyTrac. “While the majority of metro areas continued to show foreclosure activity down from a year ago, more than half reported increasing foreclosure activity from the previous quarter – an early sign that long-dormant foreclosures are coming out of hibernation in many local markets.” RealtyTrac is attributing the expected rise of foreclosures to a settlement agreement between the government and loan servicers that satisfied the issues stemming from the “Robo-signing” and predatory lending practices.
As foreclosure activity rises in 2012, make sure you stay on top of the real estate industry and foreclosure news and information. Consumers should be well aware of their options as homeowners to make sure that any foreclosure action can be mitigated in its cost – both financially and emotionally.
Resources:
Short sale requirements
The seller’s short sale package will most likely consist of:
Letter of authorization, which lets your agent speak to the bank.
HUD-1 or preliminary net sheet
Completed financial statement
Seller’s hardship letter
2 years of tax returns
2 years of W-2s
Recent payroll stubs
Last 2 months of bank statements
Comparative market analysis or list of recent comparable sales
Deed in lieu of foreclosure requirements
There are requirements for a deed in lieu of foreclosure agreement with your bank. You may be eligible for a deed in lieu of foreclosure if one or more of the following apply:
going through a hardship (for example, a job loss, divorce or a medical emergency)
unable to afford your current mortgage payment
unable to modify your current mortgage to make it affordable
tried to sell your property at fair market value with a licensed real estate agent for at least 90-120 days and were unsuccessful