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Many times homeowners in foreclosure come to me and ask, “What are my options right now?” Right now they are facing foreclosure with the auction coming up in a month or two. Here is my answer.
1. You can call your lender and ask them to reinstate the loan. You may be allowed to reinstate or update your loan by paying a lump sum or making scheduled payments to your lender over a set period of time. Explain to them that you had a few bad months, but now you’ve recovered and most lenders will try to work something out with you. This option usually works when homeowners are not too behind on payments and can show that they are better off financially.
When they reinstate the loan, the Notice of Default (NOD) is cancelled, the house comes out of foreclosure, and everyone is happy. However, the owner’s credit was still affected by the NOD, which will affect a bit.
Something similar to reinstating the loan is called a Forbearance Agreement. This is when you actually negotiate a “deal” with the bank. You can ask the lender if they will add the amount owed in late payments to the reverse of the loan, or if they would take a smaller portion up front and add the rest to the reverse of the loan or pay some up front and forgive the rest or even ask them to forgive the whole thing.
2. You can refinance your home. If there is a lot of equity in your home and you are not far behind on your payments, this is a great option. Typically, the lender would refinance the existing loan and include any late payments and fees it would need to regain control as part of the new loan. The challenge most homeowners have is that they have made the most of their home. So there is very little equity in the house, especially when you add in late payments and fees, making it very difficult to refinance. This is one of the reasons California has one of the lowest foreclosure rates in the nation, because home values are rising so fast that homeowners can refinance fairly easily if they ever get into trouble.
3. You can put your house up for sale with a real estate agent. If you have equity in the property, this can also be a great option. However, if you have little or no equity, which is often the case, it can be difficult to sell a home in a short period of time with a real estate agent. It is practically impossible when the house is over leveraged. The reason why is because you have to pay a realtor fee or commission when they list your house. Usually it is 3-6% of the purchase price. Realtors have to increase the purchase price of the home to offset their commission and pay off the loan balance. If the foreclosure auction is coming up, they have to find a qualified buyer quickly, and this usually takes time.
4. You can sell the house yourself. All you need to do is put up a FOR SALE sign in your front yard. You need to tell everyone that you are selling your house, maybe they know a friend or family member who is looking to buy in the neighborhood. If you live in a high-traffic neighborhood with listings, your chances are high that people will call you. Again, if your house is over-leveraged, you will have a very difficult time selling your house quickly.
5. You can return the property to the lender. This process of transferring property from you to the lender under these circumstances is called a deed-in-lieu of foreclosure, and is sometimes called a “friendly foreclosure” because, in essence, that’s what it’s all about. You just walk away. A deed in lieu of foreclosure does not protect your credit, nor will it cut off the rights of minor lien holders. In other words, the lender would repossess the property subject to the lesser lien holders. This will avoid the possibility of a deficiency judgment in the event that the property does not produce enough to cover outstanding debts after it goes up for auction. So if you have equity in the property, this is not a good option. You will waive all rights to receive any excess from the auction. Using this option is like giving up. Don’t give up when you still have better options.
6. You can sell your house to an investor. Most investors will negotiate with their lender to accept a discount on their loan. This is called a short sale. What this does is allow the investor to buy your home for market value so he can avoid the foreclosure auction and then he can turn around and sell it for a profit.
7. You can file for bankruptcy. There are several different “chapters” of bankruptcy. Some are exercises, some are killers, but this is the general idea. When someone files for bankruptcy, it’s almost like someone builds a “bulletproof” barrier around the house. Nobody can touch you! However, you are not free of all responsibility and most people do not understand this.
[Note: Bankruptcy should be the last alternative or option and should not be used to stop foreclosure unless you have no other option or else you need the protection of a bankruptcy due to other circumstances or situations you are currently up against. If you feel this may be your best option, please seek legal advice from a competent professional in this field.]
8. And finally, you can let it go to foreclosure. You basically do nothing. Usually you will be evicted after about 2-3 weeks. You leave with nothing in hand and a foreclosure on your credit report. This is without a doubt the worst option of all. Don’t let anyone talk you into giving up and doing nothing. At least try something. You’ve got nothing to lose. At this point there is nothing worse that can happen to you.
