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The Facts About Real Estate Foreclosure and Short Sales
There are many reasons why someone might be facing foreclosure. It could be job loss, divorce, death of a loved one, adjustable rate made payments unmanageable, and the list goes on and on. Whatever the reason, foreclosure is real, and the only way to avoid foreclosure is to take action. The type of action that you take will depend on your individual situation. So, what are my options?
Restructuring your loan to avoid foreclosure is a solution where you speak with your mortgage company to make arrangements to "restructure" the terms of the loan. This might mean that they will take your existing late payments, add them to the balance of the loan on the back end and allow you to continue making the normal payments.
Pros - With this type of action, you may be able to avoid foreclosure with a relatively simple fix. This may be ideal if the reason for your default was a temporary financial situation that has since been fixed.
Cons - This requires the cooperation of the mortgage lender in giving you this option. They are not required to do so, and in many cases they won't. Another downside is the unwillingness to admit to yourself that the problem you are having is in fact long term, and not temporary. In this case, you would be simply delaying the inevitable (and racking up more interest and fees at the same time).
Make sure that you have an honest conversation with your family about whether your financial problem can be overcome, or if it is a long term issue.
Reinstatement is when you pay all of your past due payments, become current, and continue on with the same loan. This option rarely works because of the obvious. If you had the money to catch up all of the payments, you would not be in the situation you are currently in.
Another word of caution on the reinstatement; don't borrow more money to get your mortgage caught up for reinstatement. If you can't afford to make the current payment, you can't afford to add more payments to it with borrowed money. You cannot borrow your way out of debt, and if you have to do this to get your mortgage caught up, you will only be creating a bigger hole for yourself.
Refinance your current loan to avoid foreclosure could be an option. Before you waste time and money on this option, you will need to know the following:
If you are currently past due on your mortgage, the only refinance you will qualify for is a "sub-prime" loan. Sub-prime loans have been in the news a lot lately as the real resident evil in the mortgage business. Sub-prime loans however, are not the problem in and of themselves. Personal responsibility for your own actions is the real problem with sub-prime loans. If it smells bad, don't eat it.
Along with a sub-prime loan comes terms that are significantly worse than the terms of most conventional loans. For example, if a typical 30 year fixed rate conventional loan today is at 6%, a comparable sub-prime loan would be 7.5% to 8% to start, and it is most likely an adjustable rate. Why is this significant? Because you are probably going to end up with a loan that actually has worse terms than the one that you currently have. If you can't make the payments on your current loan, refinancing into a new loan with worse terms than the one that you have already defaulted on doesn't make any sense.
The costs associated with refinancing will add more to your balance (usually from 4% to 7% of the new loan amount). This of course can add up to thousands of dollars in the long run.
You must have equity in the property to even be considered for a "foreclosure bailout" refinance. Lending guidelines vary, but usually you will need at least 25% equity after the transaction to qualify, sometimes more depending on your overall credit situation. For example, if your home is worth $100,000, your maximum loan amount would be $75,000 (including closing costs and fees) to be able to close on the transaction. In the declining market that we are in today, the likelihood of equity is dwindling. So, while refinancing may be an option, be sure to go into it with your eyes wide open.
Selling your home is another option to avoid foreclosure. This seems obvious, but many people get emotionally attached to their home, and don't want to consider it.
The truth is, if you don't make your payments, you won't have to sell it, the bank will (after they foreclose). If you have equity in your home, selling it before foreclosure is a much better option. If you sell, you get to keep the remaining equity, and save your credit for the next time you buy a home. This is also a good time to take that equity after the sale and payoff your other debts so that you can start fresh.
A Short Sale is when you sell your home to avoid foreclosure, but you don't have any equity in the home. If you owe more on your mortgage than your home can be sold for, you should consider a short sale. A short sale is defined by selling a home "short" of the balance owed on the mortgage. This is an option that is frequently accepted by mortgage companies in an effort to save time and money over the legal hassles of a foreclosure. By selling in a short sale you avoid foreclosure while getting out from under the debt load of the mortgage at the same time. Of the options discussed so far, this is the best if you are "upside down" in the house. A good resource for more information to short sale your home is http://www.preforeclosurefsbo.com/ . You will find helpful information, and a nationwide database to market your home to thousands of buyers.
Deed in lieu of Foreclosure is an option that is voluntarily turning over ownership of the home to the bank without going through the court system. This will still appear on your credit as a foreclosure, and the only help to you is that you won't be served by the sheriff or deal with the collection calls. This is not really a way out as much as it is a cop out. The end result is the same as foreclosure; it is just a little less painful.
Bankruptcy is an option if you are in over your head financially, but it does not save your home from foreclosure. Even if you file for bankruptcy protection, you still have to make the payments on the home. If you don't make payments, the mortgage company will still foreclose; they will just do it through your bankruptcy trustee. While bankruptcy is necessary in some cases for people with extreme financial turmoil, it is a decision not to be taken lightly. A bankruptcy will remain on your credit for 7 years, and can affect your ability to buy another home. Also keep in mind that bankruptcy attorneys are in the business of filing bankruptcy, so asking a bankruptcy attorney if you should file is much like asking a car salesman if you should buy a new car. Of course there are good attorneys that will give you ethical advice, but you should take their advice as a portion of your overall financial plan, and not as unbiased gospel. Foreclosure is the final step. This is when you actually lose your house, and are evicted by the court. Anything you can do to avoid this is suggested. Based on your situation, one of the above options may be for you.
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Contributor's Note
I copied this article from one that I published on Hubpages.com.
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