Facing Foreclosure
When Facing Foreclosure, Here are your options:
Do Nothing
The simplest approach is to take no action and let the foreclosure process run its course. While this option is generally thought to be the least desirable course of action, it may be the right option for some people, in some circumstances.
In this option, you will lose the house and your credit rating, but if you have no money coming in to use to employ other options and you need time to find employment, this may be your best, or only option. It is certainly better than trying to “catch up” when there is no real hope of doing so.
The process of foreclosure usually takes a minimum of seven or eight months, but can take much longer. It usually begins with three months of missed payments. In the fourth or fifth month, the lender usually begins the process of foreclosure. The process varies from state to state, depending upon whether it is a judicial state or a non-judicial state (foreclosures are filed in court or not). Either way, it generally takes three to four months to reach the first opportunity that the lender has of selling the property. Once a sale date is determined, it proceeds to sale, after which residents generally have 30 days to leave the property.
Lenders are not required to act as quickly as possible. In today’s market, there are many examples of people who have lived in their home for a long time before being forced to leave due to a foreclosure, but there is no guarantee that this will be the case for you. You need to plan on only having the minimum amount of time it takes for a foreclosure and sale to take place in your state.
This option will significantly damage your credit, as a foreclosure, along with all the missed payments leading up to it, stays on your credit report for many years and is viewed as being very derogatory.
While this option is rarely recommended, it can occasionally be the best way to go. If you do not have the ability to make the mortgage payments and you will not be able to do so in the future, then there is no point in trying to “save” the home. Going this route may buy some time to get new employment, save some money and find another place to live. This option certainly requires the least amount of effort, but again, it is not usually the best solution.
Reinstatement
By definition, a mortgage reinstatement is restoring a loan after the lender files foreclosure against the borrower who never made payments, even after the given grace period. During the process of foreclosure, the lender will deactivate the non-paid loan until a trustee sale. Prior to a trustee sale, the borrower can still reinstate the mortgage loan up to five days before the foreclosure auction.
In order to achieve a mortgage reinstatement, the borrower must bring their mortgage note current and pay only with “good funds” the delinquencies including other fees and charges. Once received, the lender will return the loan back into active status.
However, this happens under statutory regulation. In most states, borrowers have the right to reinstate their mortgage before the trustee sale, like for example in California and Oregon. Unfortunately borrowers living in Georgia cannot reinstate their mortgage before the trustee sale.
Foreclosure and the right of reinstatement
On mortgage defaults under a promissory note and deed of trust, the lender has the option to:
- Exercise the power of sale clause in the deed of trust and file a notice of foreclosure against the borrower to the trustee.
- Collect the note due, accelerate payment of the entire mortgage amount and initiate judicial foreclosure.
Typically, lenders prefer foreclosure by a trustee sale because it is hassle-free and less expensive. As a borrower you must know your statutory rights when this happens. There is actually a reinstatement law that applies to both options such that:
Under Arizona Revised Statute Section 33-813(A), the borrower is obligated to pay only “the entire amount then due…, other than the portion of the principal as would not then be due had no default occurred…” Meaning, the borrower (trustor) may reinstate their mortgage (or fix the default under the promissory note) by paying the lender the delinquent dues only, contrary to the belief that the borrower must pay the entire loan amount in order to fix the default and reinstate their mortgage.
In addition, Chapparral Development v. RMED Intern, 170 Ariz. 309, 823 P.2d 1317 (App. 1991), the Arizona Court of Appeals ruled that under A.R.S. Section 33-813(A), a borrower (trustor) has an absolute right to a mortgage reinstatement regardless if a lender forecloses by trustee’s sale or judicially. The difference is:
- In judicial foreclosure, a borrower’s right of reinstatement is cut off once a foreclosure action is filed and the borrower must pay the entire amount owed on the promissory note.
- In the context of a trustee’s sale, the borrower can reinstate up until 5:00pm on the day prior the date of the auction. However, their mortgage reinstatement rights will be extinguished once the sale is held.
Pay off/Re-Finance
Regardless of the location of the property (judicial or non-judicial state), the borrower always has the option of paying off the foreclosing lender in full prior to sale. Most homeowners do not have the available cash to pay off a mortgage in full. Therefore, a refinance with another lender may be considered. If the homeowner has the ability to secure another mortgage from another lender, the funds from the new lender will pay off the balance due to the foreclosing lender. Unfortunately, this is an option for very few homeowners. Once in foreclosure, the homeowner’s credit has been damaged by the negative reporting of missed mortgage payments – making it nearly impossible to find a lender that will approve a new mortgage.
Walk – Away Deed in Lieu of Foreclosure
Another option is to simply move and give the home back to the bank. This is typically done through what is known as a “Deed in Lieu of Foreclosure”. Basically, you are giving all of your interest in the property to the lender in order to satisfy the debt.
This is sometimes the best option when you have another place to live and you are simply unwilling to continue to meet the obligations associated with the loan. Those who benefit most from this option have typically secured another place to live, before their credit is significantly damaged, and then proceeded to give the house back to the bank. The action does affect your credit, but reflects differently on your credit report than a foreclosure.
While lenders are not excited about this option, they do typically prefer it because it costs them much less than foreclosure or bankruptcy. Lenders are not required to accept a Deed in Lieu of Foreclosure, but many will to avoid costs associated with foreclosure litigation. If this option is right for you, you need to initiate the process by contacting your lender and take the actions necessary to get it done (the lender will rarely initiate this option).
People who take this option also have the advantage of relatively little stress, compared to other options. It is a decisive and pre-emptive action, which typically makes for less worry and stress.
Unfortunately, most that begin considering this option are typically farther down the road in a foreclosure and have already been dealing with the day to day stress associated with it. Credit is typically already damaged and/or there is often not enough money to secure another place to live. Therefore, depending upon where you are in the foreclosure process, the advantages of this option may not be great for you.
Credit Counseling
There are many organizations that purport to be able to reduce your debts and set you up on a payment plan to pay them off. Many are non-profit organizations that negotiate on your behalf. Unfortunately, these organizations are rarely successful when it comes to mortgage debt.
Credit counseling typically works best with unsecured debt, such as credit cards. In fact, many credit counseling agencies are supported by the credit card companies themselves. This is why credit card companies often refer clients to these agencies. These agencies set up agreements between their clients and the credit card companies that stop interest accrual, reduce amounts owed and set up a consolidated monthly payment that clients can “afford”. Unfortunately, there is more than an 80% failure rate: Clients who do not make all the payments to complete the agreement. Failing to comply with the agreements leads to the assessment of the entire original debt, plus interest and penalties. In most cases, credit counseling is not suggested as a helpful option when facing foreclosure.
But, there is a place for every option. In a few cases, where the inability to pay the mortgage is due to excessive credit card bills, it may help to go through a credit counseling organization. Again, this assumes that you are not already significantly behind on the mortgage and can “catch up” on past due payments, interest and penalties; and it assumes that you are just a little short of meeting your obligations each month and have the income to do so if the payments were reduced; and it assumes that you will have no other expenses that will interfere with your ability to meet the obligations of your mortgage and the negotiated payment to the credit cards. If all this is true, it may be a good option for you.
Forbearance
Forbearance is an agreement between a lender and a borrower to delay a foreclosure based on certain actions that the borrower agrees to take. For instance, a lender may agree to delay foreclosure as long as the borrower is willing to pay the amount in arrears within a specified period of time, either as monthly payments, lump sums, or even as amounts added onto the “end” of the loan.
What a lender will agree to varies based upon the lender policies and the individual circumstances of the defaulted agreement. Some lenders are willing to work with you and many are not. Typically, if they are willing to forbear their right to foreclose, they want to see proof that you are able to comply with the agreement and are not just stalling the foreclosure process. This will probably mean presenting financial documents to prove your ability to comply.
The process usually starts with a “Letter of Forbearance”. This is a letter, drafted by the borrower, proposing a scenario under which the lender will delay the foreclosure process while the borrower catches up. This letter can be very simple, but is often best if coming from an attorney because of the implied threat of additional action if an agreement to forbear cannot be reached (bankruptcy for instance). Many attorneys are willing to write the letter for very little or even no money. When done for free, it is often a marketing tool for the attorney. Attorneys know that many who come to see them for a letter of forbearance are not good candidates for this option and those who are, often get turned down by the lender, leading to more business for the attorney, such as a bankruptcy filing.
Again, this option has its place and is right for some people. If you know that you are able to make the mortgage payments in the future and simply need help “catching up”, it may be your best option – assuming the lender is willing to entertain it. If you cannot afford to make the mortgage payments, then this is not a good option because it assumes that you will be making payments on the existing mortgage if the agreement is accepted.
Please keep in mind that while the agreement to forbear is being negotiated, the clock is still ticking. If you do not come to an agreement, mortgage payments, penalties and interest are still accruing.
If an agreement is reached, it will save your credit from having the black mark of a foreclosure or a bankruptcy, but your credit will still be damaged by the late payments reflected.
Partial Claims
A partial claim is an option available to homeowners with FHA loans who meet the Department of Housing and Urban Development (HUD) guidelines for a partial claim (see below). With this option, homeowners are given an interest free loan, guaranteed by HUD, to pay off the arrears and reinstate a delinquent loan. This loan must be repaid when the first mortgage is paid off, or when the property is sold. After a partial claim is completed, the homeowner does not need to worry about foreclosure or losing their home.
Homeowner must have the following partial claim qualifications:
- Long term ability to repay the loan and make normal payments.
- Inability to qualify for a forbearance agreement or workout plan.
- Ability to prove that the financial hardship is over.
- Homeowner must continue to live in the property and keep it in good livable condition.
- Existing loan must be at least 4 months, but not more than 12 months, delinquent.
Many people think a partial claim cannot be combined with other options to stop foreclosure, such as a forbearance agreement, or a Chapter 13 bankruptcy; however, if done correctly, these options can be combined to allow an even more affordable payment. In general, a partial claim is a one-time occurrence, but in rare cases, when a second, unrelated hardship has taken place, a second partial claim could be approved.
If you have fallen behind and you think you may qualify for a partial claim, you should contact your lender immediately and discuss this option. If you lender is not cooperative, or if they say you are not qualified, then you may want to seek the help of a professional to help you secure your right to a partial claim. In many cases, your lender may automatically turn you down, because they are not familiar with this process, or they are simply too lazy to begin this process. Either way, don’t give up; just find a professional who can help see you through this process until it is complete.
Loan Modification
Loan modification has been the darling of the real estate industry for the last couple years, with many people claiming to be able to help with loan modifications. In essence, it involves getting a new or amended mortgage with the lender that has better terms. Typically this means that the interest rates have been lowered, the length of loan has been extended (30 to 40 years for instance), and/or the principle has been reduced. All of this is done in an effort to create a monthly payment for the borrower that fits the borrower’s budget.
The logic of a loan modification is that a lender should prefer to keep the existing homeowner in the home rather than foreclose on the property or have the homeowner declare bankruptcy. It should be cheaper for the lender. Unfortunately, not all lenders are willing to modify loans and many borrowers do not qualify. In fact, a 2009 study showed that only 3% of seriously delinquent borrowers who applied for a loan modification got one.
One of the big reasons they are denied is that lenders do not modify loans based on an objective standard related to home value, the economy, or any other criteria related to the market. Instead, they modify based on the ability of the borrower to pay. If you do not have the income to pay the modified mortgage, they will not modify it.
Worse, if you have the income to pay the current payment, they will not modify it. For instance, if your gross income is $40,000 per year, they will calculate your ability to pay the mortgage at anywhere between 31% and 39% (depending on the lender) of your gross income. This means that you should, in their estimation, be able to pay $12,000 to $15,000 per year in payments (including principle, interest, taxes and insurance). If your monthly payment is already at $1100, then they will not modify the loan because their figures show that you should already be able to pay. They don’t care if you have other bills. They don’t care if the home value has dropped. They don’t care if you used to make more money or if your spouse used to work and has now lost the job. All they care about is the formula.
This holds true for all modifications attempted directly through the lender as well as those attempted through recent government programs such as HAMP.
Having said that, some people have entered into loan modifications and it is a great solution for many. As long as you know that you can make the new payments, it may be the way to go. It is also advisable that you set aside money during the loan modification process to pay the mortgage payments should the modification be denied. Many have placed a lot of hope in the process, spent the money that would have gone to the mortgage and then been dismayed when they were turned down and now owed several months worth of mortgage payments, penalties and interest. Please keep in mind that it you are currently in the foreclosure process while you are applying for a modification, the process continues. Like many others, you may find that you lose your home to foreclosure while waiting for a loan modification approval.
Again, it often helps to have an attorney involved because of the implied threat of other actions. A modification may come as a result of negotiations that are prompted by other actions, such as a lawsuit filed against the lender.
Short Sale
A short sale is the sale of your property for less than what you owe. This obviously requires approval from your lender. Many lenders are willing to allow a short sale because it saves them the expense of having to foreclose and then market and sell the property. Some lenders are been offering cash bonuses to delinquent homeowners who are willing to sell.
This is a good option for someone who can pay, but needs to sell the property or simply does not want the obligations associated with the mortgage and is willing and able to move (if the property is your home). It is not usually the best option if the property is your residence and you do not have the money and credit with which to get a new place to live. If there is a bonus from the lender for selling, the money may defray some of the costs of moving, but you still need to take into consideration the question of where you will live, especially if you are without income.
It is also important to note that you must use your “best efforts” to sell the property (you can’t use a short sale to simply stall for time). Of course, selling the property still takes time. During that time, debt may still accrue and foreclosure may still proceed if you are not making payments. Your credit will also be damaged to the extent that you have late payments.
Also consider the fact that although a lender may authorize you to put your home on the market for less than what is owed, that does not mean that you can sell the home and walk away free and clear. The vast majority of lenders that approve a short-sale, still come after the original homeowner for the difference between what they received in the short sale and what was owed originally – this typically results in a deficiency judgment in favor of the lender.
If you do decide that a short sale is your best option, having a good real estate broker, one who understands and is experienced with the process, can be very helpful.
Negotiated Settlements
Lenders may be willing to negotiate a settlement of your debt. This often means taking a percentage of what is owed in exchange for the retirement of the debt.
For some, it is a great option to pull money from retirement, business or family and buy out their mortgage for dollar fraction of what is owed. If necessary, the property can then be mortgaged again with a new lender.For a lender, there is no emotion involved in the decision to settle. It simply has to make sense after doing a cost/benefit analysis. A lender is likely to do this in a declining market or when they feel like they may not be able to recoup their investment. They also factor in what it will cost them if they have to pursue or fight other courses of action, such as foreclosure, bankruptcy, or law suits. In fact, many times, offers for settlement are best for the borrower when combined with these others actions, or the threat of these actions.
Obviously, this option is good for someone who has access to the money needed to settle and not good for someone who does not have access to the money to settle. It is important to note that settlement does not involve payment plans. Banks and lenders are in the business of amortizing debt and it makes no sense for them to accept payments as part of a settlement (in their estimation, if you can afford to make payments for a short time, you should be able to make payment for a long time, which is equivalent to a mortgage). Therefore, it’s typically a lump sum or nothing.
With this option, credit may be affected, but if there’s enough leverage, it may also become part of the settlement agreement to remove any damaging credit issues.
Again, if this is a good option for you, then it is often best when combined with other actions designed to force the lender’s hand. Involving an attorney or someone with a lot of experience negotiating with lenders is advisable.
Negotiate Settlement with Investors Ready to Help
As stated in the previous option, lenders may be willing to settle a debt for less than what is owed. Of course, not all borrowers have the ability to pay a settlement amount, even if they can negotiate one.
There are however, some individual investors and some companies who may be willing to provide the money needed to settle a debt. Of course, you now have a debt to them that needs to be repaid, which may not always be a good thing. It is very important to be cautious when entering into any agreement with investors offering to help you settle your mortgage debt.
There are some reputable investors and firms who can help in some circumstances. Most take an option on the home, providing cash through an option consideration payment. Some actually buy the home through a short sale or other negotiated transaction. Either way, take the time to thoroughly investigate the reputation of the investors in question.
If the home is your primary residence and your intent is to keep the home, most of the reputable investors willing to help you negotiate a settlement will take ownership of the home and then sign a lease, with an option to buy, with you. Others will provide for ways of buying out their option on the home. Either way, you still owe money to someone. Make sure you have the ability and intention of paying them.
if the property is not your residence, or you do not intend on staying in the home, then most reputable investors working in this area of expertise will help you negotiate a settlement and then turn around and sell the property. Sometimes there is a little cash for you that results from the final sale, while other times they simply help you get out from under the debt.
Again, be very careful about investors and firms with whom you work. Investigate them thoroughly. Be wary of large up-front payments to people claiming to have the ability to settle your debt. Most reputable investors helping people to do this charge little or nothing up front and instead make their money through the transactions.
