If the foreclose sale (sheriff sale) has NOT been held yet, the seller is in what’scalled “Pre-Foreclosure”. There is still time to take action to AVOID an actual foreclosure that will remain on their credit record for 10 years.
Option One: Work with their Current Lender.
A. Forbearance: Forbearance is an agreement between the current lender and the borrower that reinstatesthe delinquent loan through the payment of a lump sum or a schedule of payments over a period of time. If a borrower got behind in his or her payments, (because of a lapse of employment, and now has income coming in again) the lender mayallow the borrower to pay the money back through installment payments over six months. The lender may also decide toallow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet andpay any remaining arrearages in one lump sum. The forbearance may be an oral agreement or written contract between thelender and the borrower. Generally these agreements will not extend beyond 12 months.
B. Loan Modification: A loan modification is a change in any of the terms of the original note. This includesdecreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender’sdiscretion to assist the borrower through a temporary setback. Generally a lender will consider a loan modification when foreclosure is imminent and the borrower’s income has been decreased and he or she is unable to make the mortgage payments on the existing terms, but will be able to keep the loan current after the loan modification.
Option Two: Work with a New Lender
A. Refinance: Mortgage refinancing is a good option when a new lender would allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a deteriorating financial situation. Refinances are generally open to borrowers that face a temporary setback in their financial situation, have an outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.
B. Junior Mortgage, Line of Credit: A new lender may offer a second loan or junior lien to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Loan fees are typically 5-10 times the average loan fees for an “A Credit” borrower. Plus interest rates often rival credit cards. Use caution before you choose a new loan. If they cannot make payments on their current loan(s), how can they on a new more costly loan? Make sure to watch out for Predatory Lenders.
Option Three: File Bankruptcy
Bankruptcy is a way for people who owe more money than they can pay right now, (debtors), to either work out a plan to repay the money over time in a chapter 11, chapter 12, or chapter 13 filings; or wipe out (discharge) most of their bills in a chapter 7 filing. While the debtor is working out a plan, or the trustee is gathering the available assets to sell, the Bankruptcy Code provides that creditors must stop all collection efforts against the debtor. When the bankruptcy petition is stamped “Relief Ordered” upon filing, you are immediately protected from your creditors.
What chapter you choose to file under, what bills can be eliminated, how long payments can be stretched out, and what possessions you can keep, will be controlled now by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (the owners will NO longer have control over any of his assets). These are federal laws, which means they apply all over the United States. The Code and Rules are found in Title 11 of the United States Code. Here is the U.S. Bankruptcy Code & Rules Booklet — May 2005 Black Line Edition
Borrowers in default should think carefully before choosing bankruptcy, because it will have a serious financial impact on their lives for the next 10 years!
The bankruptcy petition, schedules and plans are public documents and are available for viewing through that district’s website. Credit reporting agencies regularly collect information from the petitions filed and report the information on their credit reporting services. Bankruptcies normally will remain on your credit report for up to ten (10) years and will be taken into consideration by any person reviewing a credit report for the purpose of extending credit in the future. The decision whether to grant you credit in the future is strictly up to the creditor and varies from creditor to creditor depending on the type of credit requested.
The best way for one to obtain credit in the future is to generate an adequate and regular income and pay all financial obligations in a timely and responsible manner. Many creditors will not deal with a borrower who filed bankruptcy in the future unless he or she has already established credit with someone else and demonstrate that they are reliable debtors. In general it is recommended that, after the filing of a bankruptcy, one must learn to live within his/her income and not request credit that is not absolutely necessary.
Many owners, who file bankruptcy and then later realize that they cannot keep their home and must sell it, find it impossible to find a place to rent. Oftentimes after a bankruptcy filing and a foreclosure, getting a landlord to accept you as a tenant, is an almost impossible task. Now these owners find themselves homeless… something I’m sure they did not expect to have happen (but that happens quite often)!
Option Four: Sell Your Home
A. List with a Realtor on the MLS (Multiple Listing Service): Some owners have the great idea to try to “hedge themselves” by shopping for a new loan at the same time they list their house on the market. They quickly find out that this doesn’t work! Their mortgage broker (or new lender) has strict policies that state if you put your house on the market, they will terminate your loan application! So that means the owner must give up on any chance of a new loan, once they decide to list and sell their house. Quite often this is too big a decision to make, so they decide to “put off” listing their house until the very last minute. Once the owner has decided to sell, and if they have at least 6-12 weeks prior to their foreclosure auction, it may be an option to contact a Realtor to represent you. If their house is in good condition in a good market, you may find a buyer quickly and can get close to fair market value. However, you have a big risk because the buyers will have to get their own financing. Can it close on time before the pending foreclosure? The process of lenders approving the buyers credit, appraising the house, completing underwriting, reviewing title, getting payoff demands and drawing documents — can take 4 or more weeks to complete (assuming no problems pop up). If the new buyers could not get the loan, or
they could not close in time, the seller will helplessly watch their house go to auction. This is a gamble many would rather not take.
B. Sell to an Investor: After an owner has exhausted all the options above, selling the house to an reputable investor who offers “cash at closing”; no new loan contingencies; no repairs needed (as is); fast escrow; is a for sure sale providing a fresh start with reputation and integrity intact would be their best option. Although the investor’s price is less than market value, the investor will also be able to salvage the seller’s credit, bring his loans current, keep them current (and improve his credit) and maybe even let them retain a portion of their remaining equity in their home. This is a MUCH better solution for the seller than doing nothing, and losing everything at the foreclosure auction.
Option Five: Giving Up and Letting it Go
A. Deed-in-Lieu: A deed-in-lieu (DIL) of foreclosure is a voluntary conveyance of title to the lender. Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure. In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage.In order to qualify for a DIL, most lenders state that there must NOT be a second mortgage or junior liens on the property. Properties with values in excess of the amount owed against the home (to include normal closing costs) should consider selling the property before voluntarily conveying the home to the lender.
B. Hope for a Miracle: Last and least favorable choice is to do nothing and let the house go to a sheriff sale. Sometimes procrastination takes over, and the owners simply hide from the world and hope “it will all go away”. Well it does go away, just not as they expected. The lender will hold an involuntary sheriff sale of their house and sell it to the highest bidder at the foreclosure auction. If there are no bidders, the lender wins the house by default and it is now an REO (real estate owned) property, the owner still has to vacate the home, and usually walks away with nothing. In some cases, the lender may even pursue a deficiency judgment against the homeowner when they don’t sell the property at the sheriff sale for enough to cover the amount owed to them. There is also typically a 10-day redemption period following the sheriff sale in which the homeowner still has a chance to pay-off everything that is owed and can keep the property. This usually is only the case if the homeowner was actively working on either selling or refinancing in advance of the foreclosure sale. If the home is actually foreclosed on (sheriff sale held), this will have a long-term (10-year) impact on the homeowners credit record.
This is one of the most derogatory actions that can appear on someone credit report. It will have a lasting impact on the persons ability to recover form the unfortunate circumstance. AVOID a foreclosure!!!