16 Foreclosure Options to Consider Before Doing Anything with Your Bank
A few months ago, I was working out with my work out partner in the gym. It was Monday morning, and normally we’re in a good mood. We’re usually sharing funny stories about our weekend hijinx, not foreclosure options. This morning, however, he was looking really depressed.
“What’s going on?” I prodded. We were close, so there weren’t many topics that were off limits.
“My folks are losing their house!” He told me.
He explained to me how his dad had lost his job for a few months the previous summer. He’d since gotten a new job but they had fallen behind on their payments, and his new job was paying much less.
I consider myself financially savvy, so I decided to help him. I wanted to share with him some good online articles outlining his parent’s foreclosure options. Surprisingly, I was frustrated to find that nothing really good existed. Most sites only mentioned a few of the major foreclosure options, like loan modification or forbearance.
Since I happen to be in real estate, I know there are tons of other foreclosure options available to people going through hardship. I decided to do extensive research to compile a list of foreclosure options all in one place. I wanted to provide my friend (and those like him) a single link that would highlight every foreclosure option known to man.
As far as I can tell, this does not exist anywhere else on the internet.
The Good News
The good news is that there are many more foreclosure options available to someone in financial trouble. The bad news is that if you’re behind on your loan, there are not a lot of great foreclosure options. The challenge then becomes finding the best solution for you and your family.
Most people that get to this place have had some life crisis that they didn’t (or couldn’t) predict. Times of crisis are not the time to roll over and become a victim. If you grit your teeth, educate yourself on all the foreclosure options out there, and try to make a rational decision, chances are you’ll end up way better off than if you just give up.
The first thing I told my friend was:
There are so many complicated pieces to foreclosure, and each foreclosure option has pros and cons. Some major factors to consider are: how your credit score is impacted, how your bank account is impacted, where you will live, and more.
I have decided to organize these foreclosure options in terms of long-term financial impact, from least to greatest. This guide on foreclosure options is meant to just give you an idea of what’s possible. After all, each person’s situation can be vastly different.
Once you have educated yourself, I recommend contacting a professional, just be wary about their interests. For example, many lawyers might be specialists in a few of these foreclosure options and push those on you just because that’s what they know best, or more nefariously, because it’s in their self-interest.
List of Foreclosure Options
- Defend in Court
- Become a Landlord
- Reinstatement of Defaulted Mortgage
- Apply for Government Assistance
- Loan modification
- Mortgage assumption
- Equitable redemption
- Statutory redemption
- Reverse mortgage
- Deed in lieu of foreclosure
- Deed for lease
- Short sale
- Do nothing
- Frequently Asked Questions
Disclaimer: This post is for informational purposes only and does not provide legal, accounting, or financial advice. I am not a lawyer or accountant. Visitors should not rely upon this information as a substitute for legal, accounting, or financial advice. While I make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have a specific problem, you should seek advice from a qualified professional in your own jurisdiction.
Foreclosure Option #1: Defend in court
Your first foreclosure option is to take the fight to the bank. If you think there is an error, you can defend yourself in court when the bank sues you. If you really want to play hardball, you can sue or countersue the bank!
Don’t get your hopes up though, most of these defenses rely on the bank doing something unethically, fraudulently, or incompetently. In many cases, they might have done that but since you’re not an expert, you won’t even notice.
In general, there are 5 main areas where you might actually be able to fight off a foreclosure in court:
- Improper service of notice. The bank has to follow certain rules when serving you notice of foreclosure. If they didn’t follow those rules, either intentionally or unintentionally, you can get the lawsuit dismissed
- Improper loan closing. The bank has to follow certain rules during the closing of your loan, mainly related to providing the right paperwork. If it wasn’t done properly, you may be able to get your loan canceled
- Breach of contract. If you have a valid contract, the bank breached some obligation imposed by that contract, and there have been resulting damages, you can sue the bank for breach of contract.
- Lack of standing/defective chain of title. If your loan has been sold/transferred to multiple banks over the years, it’s possible they didn’t transfer this loan properly. This was a huge defense during the 2008 financial crisis and a lot of people successfully fought off foreclosure as a result
- Fraud and misrepresentation. If the bank, loan servicing company, or mortgage broker have lied about anything, you can defend a foreclosure on these grounds, although you’ll have to be very specific and provide clear proof of this.
What is the process for fighting a foreclosure in court?
The basic process is you hire a lawyer to represent you in court. This can be a lengthy process, which will depend on many factors, such as the details of your case, your state laws, and even the caseload of the particular court. A simple case in Texas might take several months, whereas a complex case in New York might take several years.
PROS AND CONS OF DEFENDING IN COURT
Foreclosure Option #2: Rent it out
You have a huge asset surrounding you: your house! Why not use it to make some income and help make the payments? There are several ways to do this, but in general, you find a tenant to live in part or all of your house. They pay you rent, which you then pay to the bank.
While on the surface this foreclosure option looks daunting, it’s probably the easiest one, because you don’t have to get approval from your bank or get help from a lawyer. You don’t even have to talk to your bank.
What is the process for renting out a potential foreclosure?
Step 1: Market Analysis.
The first step is to look at local rental rates to see if this option makes sense: a good scenario might look like this: you are $200 short every month, but have an extra room. You can rent that room out for $250 a month, which will perfectly cover the amount you’re short plus additional utility costs.
Or your mortgage payment might be $1200 a month but your house will rent for $1500. You can downsize to an apartment, and rent your house out so the monthly rent will pay the mortgage for you.
Step 2: Determine Make-Ready Costs.
If the rental rates in your area make this look like a promising option, you next need to consider the costs to get your house ready.
Even if you’re only renting a room, you’re probably going to have to do some repairs and/or upgrades. You won’t get any good tenants that will be happy to live in a dirty room or use a dated bathroom with a leaky toilet. If the repairs are only cosmetic, and you’re handy with a hammer and paintbrush, you can save a lot of money by doing the fixes yourself.
If your house is severely distressed, don’t lose hope, it’s still possible that you can go this route by offering a handyman tenant reduced rent if he completes so many repairs. Obviously, this will affect your ability to pay the mortgage, so again, do the math to see if it will work.
Step 3: Add in Administrative Costs.
In addition to repairs, some other major costs you need to consider are property management fees (not necessary but recommended), insurance (rental insurance may or may not be more than your homeowner’s insurance), and vacancy.
Step 4: Find a Tenant.
The analysis described in the previous steps are the most important part, but if you decide this foreclosure option is the way you want to go, the next part is relatively simple: find a trusted real estate agent and/or property manager to help you get your house ready.
Yes, you can find, screen, meet, and show dozens of potential tenants your house…but I recommend focusing your energy on finding a new place to live and moving out; let the professionals deal with renting your house out.
PROS AND CONS OF BECOMING A LANDLORD
- Partially or completely cover monthly mortgage payments
- Keep your house and your credit intact
- If you have to make upgrades or repairs to the house, you can deduct these as rental expenses. You can’t do that if you’re selling your home.
- Even though you might have to move out, you’ll have the option of moving back to your beloved house at some point down the road when your finances are better.
- You’ll have to move, unless you only rent out part of your house. But hey, you’re gonna have to move anyway if you get foreclosed upon.
- Now you’re a landlord and if you can’t afford a property manager, this might not be your cup of tea
- Depending on the state of your house you might have to make serious repairs/upgrades to make it ready for a tenant
Foreclosure Option #3: Refinance
If you’re not too behind on your payments, and you still have your job, the easiest thing is to just refinance your house. If interest rates are much lower than they were when you originally bought the house, your payments might go down significantly.
Even if mortgage rates are higher, you still might be able to reduce your monthly payments by getting a longer-term loan. This is obviously going to keep you in debt longer, but it will protect your credit and you’ll get to keep your house.
This foreclosure option won’t work if you’ve had a life crisis (such as lost your job), or your house value has gone down significantly in value. Your new loan has to be enough to cover the total amount of your current loan.
What is the process for refinancing out of foreclosure?
The process for refinancing your house is almost the exact same process you followed when getting the original loan. You’ll apply through a lender (doesn’t have to be your current lender), they’ll send someone to appraise your house, inspect all your financial documents (such as taxes and income), conduct underwriting, and approve the loan.
The whole process usually takes 30-45 days. At closing, your old loan will be paid off, and you’ll begin paying according to the terms of the new loan.
PROS AND CONS OF REFINANCING
- Keep your house
- Protect your credit score
- Fairly straightforward process
- Even though you might have to move out, you’ll have the option of moving back to your beloved house at some point down the road when your finances are better.
- Won’t work if you’re underwater
- Depending on circumstances, might greatly extend the amount of time you’re in debt
Foreclosure Option #4: Reinstatement of the Defaulted Mortgage
When you’re behind on your mortgage, your bank will tell you that you’re in default and that the entire loan is due immediately. While this is technically true, the bank will allow you to get current on the loan, pay back payments, and resume your normal mortgage payments. This is called reinstatement.
If you fall behind on your mortgage due to a temporary setback, but you believe you can still make the normal payments, this is a good foreclosure option.
If you’ve undergone a permanent change, you might not want to do this, since if you’re having trouble making your payments under your current mortgage terms you will continue to have trouble in the future.
One of the biggest things that will affect whether you can do this is whether you have access to cash. You’re usually late on your mortgage payment for a reason: you don’t have money.
Still, you don’t need to have a wad of cash lying under your bed; get creative. You might have to sell the new boat if you want to keep the house. Or you might be able to borrow from a parent who will forgive your debt or not demand immediate repayment. There are lots of other sources of cash…you just have to decide how important the house is to you.
One thing to note: if you have a loan with a high interest rate, or negative equity in your home, a loan modification or refinance are probably better foreclosure options.
What is the process for reinstating a defaulted mortgage?
You can’t just pay the missing payments if you’re behind on a mortgage, since you’ve probably incurred fines and late fees, so you’ll have to request a reinstatement quote from your lender. They’ll tell you the exact amount, to the penny, you need to pay in order to become current. You’ll also have a deadline to make the payment.
If you miss this deadline, you have to get another quote, which of course, will be higher than the previous quote. The further into the foreclosure process you are, the more you’re going to have to pay, since the bank is going to require you to cover the costs it’s incurred for the foreclosure process.
It’s important that if you want to do a reinstatement, you’re paying as much of your monthly bill as possible (including any late fees). If you don’t, the fees and interest will continue to accumulate and the eventual reinstatement payment will be crushing. You can keep this reinstatement payment as low as possible by paying as much as you can when it’s due along the way.
It’s also very important that you communicate clearly, in writing, and document every interaction with the lender. If one thing goes wrong, like your payment is just a few hours late, or not the exact amount that’s due, your lender will not stop the foreclosure and will sell your house.
PROS AND CONS OF MORTGAGE REINSTATEMENT
- You get to keep your house
- The bank will stop the foreclosure process
- Doesn’t require the bank’s approval
- Your credit score will still be hurt, since you’ve missed payments, but you won’t have a foreclosure lurking on your credit report for 7 years.
Foreclosure Option # 5: Apply for Government Assistance
There are lots of programs available to homeowners struggling to pay their mortgage, many put in place as a result of the 2008 mortgage crisis. Most of them apply to specific circumstances, and many are not required of your lender.
In other words, if you find a program that is meant to address your situation, you will still have to ask your bank if they are part of that program.
Another thing to consider is that many of these programs were made specifically to help people during that recession, so some of them have end dates, and require your mortgage to fit specific criteria. For example, many require your mortgage to have been opened prior to 2009.
What is the process for applying for government assistance when in foreclosure?
First, go to the U.S. Department of Housing and Urban Development :
Once you’re there, look through the many government programs designed to help troubled homeowners. If you find any that might apply to you, contact your bank to apply.
PROS AND CONS OF GOVERNMENT ASSISTANCE
Foreclosure Option #6: Loan modification
A loan modification is what it sounds like. It modifies the loan to make it easier to pay. This can be a temporary or permanent modification, and can include a lower interest rate, extended timeline, or other combination.
This is a highly popular foreclosure option. Banks actually would prefer this to taking your home. Think about it, they’re not in the real estate business. They’re in the money business. They’d rather have your money, even if a bit late, than a home that some pissed off person has been living in.
It’s important to note that this is not the same thing as a refinance. In a refinance you’re taking out a new 15 or 30-year loan to pay off your existing loan. With a loan modification, the bank is making adjustments to your interest rate, payoff period or other factors to make it easier for you to pay off the existing loan.
The bank is still gonna get their money. Sometimes there may be temporary relief, but long-term penalties. For example, your monthly payments may drop, but the time period is extended…do you really want to be paying off your house for another 50 years?
Other modifications might require a balloon payment in a year or two, so loan modification is really just a temporary solution. For someone who has temporary issues paying the mortgage (such as job loss), this might be the best foreclosure option. If you are having trouble paying because you can’t manage your money, loan modification is only going to delay the inevitable.
What is the process for loan modification?
Even though a lender might prefer this option, it won’t just happen automatically…once you get a notification of delinquency, you have 120 days to request a loan modification.
Once you’ve submitted an application for loan modification on time, in most cases the lender is prevented by law from moving forward with foreclosure. In effect, the foreclosure is put on hold.
Applying for a loan modification is often more tedious than just applying for a mortgage. The process can take months, even years. Most borrowers will have to submit documents in a timely manner, and conduct extensive follow-up with the bank to keep the process moving.
Ideally the bank will take about a month to review the application and make a decision. Many banks at this point will offer you a trial period, where you’re basically proving that you can make the payments if the loan gets modified. If you make all your payments on time, you’ll likely get approved within a few weeks after the trial period has ended.
Once the bank approves the loan modification, you will sign and notarize the written modification agreement, and return the forms to the lender.
If you’re not behind on your payments before seeking a modification, it’s possible that your credit score will remain intact. This will depend on how the bank reports this to the credit bureau.
PROS AND CONS OF LOAN MODIFICATION
- Banks want to do it.
- Put foreclosure on hold.
- Missed payments can be added to the cost of the loan.
- Limited impact to your credit score if you’re up-to-date on your payments
Foreclosure Option #7: Forbearance
Forbearance is an agreement to delay foreclosure. This is usually done when the borrower has been on good terms with the loan but may have a temporary challenge that makes payment difficult, such as job loss or an accident. Most recently when hurricanes Harvey and Irma devastated parts of Texas and Florida, many lenders proactively offered forbearance to their borrowers. Such nice people.
What is the process for loan forbearance?
1. Talk to the bank.
Contact your bank to tell them you’re having trouble paying the mortgage. You’ll have to provide a lot of documentation (pay stubs, proof of funds, etc.) but since there are no permanent changes to the loan, less time and work is required than most other foreclosure options.
2. Come to terms
You and the bank will agree to a forbearance period (usually just a few months), at the end of which you’ll go back to your regular mortgage payment schedule. At this time, you will also have to pay extra until the amount due has been paid off.
For example, if you have monthly payments of $1000, and get forbearance agreement of no payments for a year, you will have no payments for a year. At the end of the year, you’ll have to pay the bank $12,000 to get current.
Ouch…that seems like a lot, and it is, but usually you’re going to be due a big insurance check that will cover this amount. If you’re not expecting an insurance check (such as if you lost your job), then you can also ask the bank if you can pay extra each month until the loan is current.
3. Don’t forget your other obligations
One thing you should be aware of…you are still on the hook for insurance and property taxes. A homeowner with an escrow account is usually not thinking about this as they are paid directly out of the escrow account.
If mortgage payments are paused for several months, the escrow account probably won’t have enough money to pay the insurance or property tax bill when due. Anyone doing a mortgage forbearance needs to be aware of this and able to cover the escrow shortfall (either through out-of-pocket payment or working out a deal with the tax collector)
4. Request a freeze in reporting
You should also ask the bank to freeze reporting until after the forbearance; after hurricane Harvey, some banks froze reporting of late payments. Even though the bank has agreed you can pay late, deferred payments might show up on your credit report as delinquent. This will hurt your credit score.
PROS AND CONS OF FORBEARANCE
- Credit is less affected (if at all) than other measures
- This is also less burdensome administratively than a loan modification.
- Quicker than a loan modification
Foreclosure Option #8. Assignment of mortgage payments, or “mortgage assumption”
One way you can avoid foreclosure is just to have someone else take over payments, usually by selling them the house. You probably won’t get as much money as you’re hoping for when doing a mortgage assumption, but in many cases, you can actually walk away with a large chunk of change, depending on the circumstances, such as how much equity you have in the house, the condition of the house, and even your mortgage rate.
Let me explain:
If you have a lot of equity in the house, for example, if you only owe $50,000 on a $200,000, you’ll get a lot more money than if you owe $190,000. In fact, if you owe too much, you won’t be able to find a buyer.
If the house is in poor condition, you’re going to receive a lot less, since the new buyer is going to have to factor repair costs in how much they can buy the house for.
If you have a great mortgage rate, you will be able to get a higher price for your house, especially if the current interest rates are much higher. Buyers will be willing to pay more for the lower interest rate that they can’t currently get from a bank. On the flip side, if your mortgage rate is too high, you won’t be able to find a buyer.
What is the process for mortgage assumption?
Most* loans these days have a “due on sale” clause, which means if you sell the house, the entire mortgage amount is automatically due. There are a few exceptions, such as selling the house to a relative, or as a result of a selling a house in a divorce.
While a bank can technically force you to pay the loan if you sell the house, most of the time, the bank will look the other way as long as the mortgage payments keep coming. Thus, many people will sell the house, not say anything to the bank, and the bank is none the wiser. I don’t recommend this, as it’s risky and simply not necessary.
To keep everything above board, many buyers and sellers will call the bank and explain what they are doing prior to any sale. Depending on the circumstances, the person you’re talking to, the size of the bank, and other factors, the bank is likely to give a “thumbs up,” even if it’s not officially in writing.
*Certain loans intentionally lack a “due on sale” clause, notably FHA, VA, and USDA loans.
So where would you go about finding someone to assume your mortgage? The first place I’d suggest is family and friends. After that, there are professional investors, like Barker Hill Realty, that specialize in buying foreclosed homes, including through mortgage assumption.
PROS AND CONS OF MORTGAGE ASSUMPTION
- Avoid foreclosure, protecting your credit
- Relatively simple process, especially if you can get the bank on board
- You might be able to sell your house for more, if you have a mortgage with great terms
- You will probably lose your house and have to move. Some buyers will allow you to stay in the house as a tenant, but don’t count on it.
- Legally, you remain liable for the mortgage, even though someone else is now paying it
- If you have a lot of equity in the house, it might be hard to find a buyer, since they’ll have to come up with that amount to purchase the house.
Foreclosure Option #9: Equitable Redemption
Equitable redemption is a fancy term that simply refers to the homeowner paying off the deficient mortgage prior to a foreclosure sale. So basically, you pay off the loan plus any fees to the bank, and you get to keep your house.
Only a very small portion of people will be able to exercise this foreclosure option. If you have enough money to pay off the loan in full, you probably would never have defaulted in the first place. Still, maybe you win the lottery or a rich uncle dies leaving you a fortune, you can keep your house by simply paying off the loan.
What is the process for equitable redemption?
The process is similar to a reinstatement of mortgage, where the homeowner will request a statement from the bank requesting the amount owed. But whereas with a reinstatement, you will ask for a statement showing how much you owe to catch up, with redemption you will ask for a total payoff statement, which will show you how much you owe in total.
The payoff statement will include the loan, any fees and fines, and interest due. Because it includes fines, fees, and interest, it will have a date tied to the amount (since if you pay after this date the fines and interest will have increased).
PROS AND CONS OF EQUITABLE REDEMPTION
Foreclosure Option #10: Statutory Redemption
Whereas equitable redemption is the homeowner buying the house (by paying off the loan), prior to a foreclosure sale, Statutory Redemption is buying the house back after the house has been sold. Statutory redemption is based on state law, and thus differs state-by-state. Texas does not offer statutory redemption. Here’s a state-by-state list.
What is the process for statutory redemption?
Each state will have a certain redemption period, a set amount of time after the house has been sold for the previous owner to buy it back. In general, the previous owner will send a written request to the new owner asking for a full statement of how much is owed.
The total amount the previous owner will have to pay is state-dependent. In some states, you only have to pay the auction price (plus any administrative fees), even if it was less than you owed. In some states, if the purchaser has made any improvements, you’ll have to pay for those also.
PROS AND CONS OF STATUTORY REDEMPTION
- You get to keep the house
- You have more time to obtain the funds needed
Foreclosure Option #11: Reverse Mortgage
If you’re over 62 years of age, have significant equity in the house, and live in the house, you will probably be eligible for a reverse mortgage. A reverse mortgage will allow you to take out most of that equity to pay off the original mortgage which is facing foreclosure.
Here’s an example of how it works (simplified): if you own a house worth $200,000, but only owe $50,000, you can get a reverse mortgage for $200,000. You would use part of that to pay off the $50,000 original loan. The remainder of the $150,000 would be paid out to you in monthly payments.
As you receive each monthly payment, the amount you owe the bank accrues, so over time your loan balance will increase while your equity in the house decreases. The reverse mortgage is due upon death of occupant or sale of the house. If you died a day after you took out the loan, your estate would owe the bank $50,000.
What is the process for getting a reverse mortgage?
The process for obtaining a reverse mortgage is very similar to obtaining a regular mortgage. You have to apply through a lengthy administrative application process, the application will be processed by the bank, go through underwriting, and then closing.
The big difference, of course, is that upon closing, you start receiving payments from the bank, instead of the other way around.
PROS AND CONS OF REVERSE MORTGAGE
Foreclosure Option 12. Deed in lieu of foreclosure
Deed in lieu of foreclosure (also called Mortgage Release or friendly foreclosure) is just what is sounds like. The homeowner hands over the deed to his/her house to the lender, which the lender accepts instead of foreclosing upon the house. In other words, the homeowner gives up the house and the bank forgives the loan.
This foreclosure option is available for people in financial straits who are unable to refinance or modify their existing mortgage. Your financial hardship is not temporary, and your house is underwater (you can’t sell it to pay off the loan). After all, voluntarily giving up your beloved home should be one of your last resorts.
You also must only have 1 loan on the house. If you have 2 mortgages on your house, unless the same bank owns both loans, you probably can’t do this foreclosure option. You could hand over your deed to one bank, but the other bank is still going to want their loan paid off.
If you’re underwater (say you owe $200,000 on a house, and it’s only worth $150,000), why would the bank accept the house? Why wouldn’t it just foreclose on you instead and try to get the entire $200,000 owed?
Banks don’t want your house, but it’s costly and time consuming to them to conduct a foreclosure. If you’re willing to voluntarily sign over the deed, leave the home in good condition, and not fight the bank, it’s often advantageous for them to work with you.
What is the process for doing a deed in lieu of foreclosure?
The process for doing a deed in lieu of foreclosure varies from state to state and lender to lender. In general though, once the homeowner falls behind on mortgage payments, he/she will contact the bank and explore this as an option. The bank doesn’t really want your house, so you might have to negotiate a bit to do this.
You’ll also have to share information about your financial situation, basically proving that this is the best option. For example, you’ll have to provide proof of income and other documentation. The bank will probably ask you why you can’t just sell the house to pay off the loan; in this case you’ll have to prove that the house isn’t worth the amount you owe.
PROS AND CONS OF DEED IN LIEU OF FORECLOSURE
- Won’t hurt your credit as much as a foreclosure would
- Avoid future lawsuits where the bank is trying to recover the difference they’re owed (if the house is worth less than the loan).
- Get resolution faster. Process can take around 3 months to resolve.
- With some banks, you can get relocation money.
- With some banks, you can stay in the house and become a tenant, leasing it from the bank. (See foreclosure option 13: Deed for lease)
- Still hurt your credit score
- You’re losing your house
- It will be harder to buy another house again for up to 4 years. Although this is much better than waiting 7 years (by going through a full foreclosure), it’s worse than the 2 years you’ll have to wait by going through a short sale.
- May have tax implications. The IRS usually views forgiven debt as income, so talk to a tax accountant to see if you’re going to have to pay more taxes.
Foreclosure Option #13: Deed for Lease
Similar to the deed in lieu of foreclosure, this foreclosure option entails handing over the deed to your house to the bank in exchange for forgiving the loan. With a deed for lease, however, the bank agrees to allow you to stay in the home as its tenant for up to 3 years.
Usually you’ll pay market rental rates, and in most situations, this payment is significantly lower than your mortgage payment, because it doesn’t include homeowner’s insurance or property taxes. In addition, you’ll also save money on repairs and maintenance, as that is now the landlord’s job.
What is the process for doing a deed for lease?
The first thing you should do if this foreclosure option appeals to you is look at current market rates. If your mortgage payments are $2000 a month, but your house will only rent out for $1000 a month it might make sense. Conversely, if the house rents out for $2500 a month, then this option isn’t viable.
Administratively, doing a deed for lease is similar to the deed in lieu of foreclosure process, and varies from state to state and lender to lender. Once you fall behind on your mortgage, call the bank to see if this is a foreclosure option they offer. You’ll also have to share information about your financial situation, and convince them that this is the best option.
PROS AND CONS OF DEED FOR LEASE
Foreclosure Option #14: Short sale
A short sale is when you sell your house for less than what you owe. This was a huge deal during the 2008 real estate crash, when people may have bought a house for $250,000, with a $200,000 loan, and then overnight their house is worth only $100,000. Selling the house for a price that will allow them to pay off the mortgage is impossible.
What is the process for doing a short sale?
If you want to go down this route, you will have to get approval from the lender. This might be tough to do, but on the other hand, if you can’t sell the house for enough money to pay off the debt, the bank isn’t going to be able to either.
No matter what the bank does, it’s not going to be able to get its money back from selling the house, so it will often be willing to approve a short sale. Once the short sale is approved, you’ll need to hire a real estate agent who specializes in short sales.
There are a lot of administrative peculiarities with a short sale, so you’ll want someone helping you that has experience.
Selling a house via short sale is going to take much longer than normal. Just the process of getting approval to do a short sale from the bank may take months. Then once you get an offer, it might take months for the bank to accept or deny.
For that reason, your house might sit on the market longer than normal also because buyers know they will have to wait a long time to get their offer approved.
PROS AND CONS OF SHORT SALE
- Most of the time you’ll be back on your feet quickly. Many people are able to get new loans in less than a year after a short sale
- It will negatively affect your credit score, but not nearly as harshly as a foreclosure or bankruptcy.
- You may have to pay income tax on the amount of forgiven debt
- This can be a very lengthy process
- Starting a short sale process does not stop a foreclosure. Although you can ask the lender, there are no guarantees.
- You won’t get to keep your house (obviously…you’re selling it)
Foreclosure Option #15: Bankruptcy
Bankruptcy is the legal declaration that you can’t pay your debts. There are many different types of bankruptcy lined out in the federal Bankruptcy Code. Each type of bankruptcy has a different chapter in the code, which is usually how people refer to each type. The chapters relevant to homeowners facing foreclosure are chapter 7 and chapter 13.
Chapter 7 bankruptcy is often referred to as a “liquidation” bankruptcy, because your property can be sold (liquidated) to pay off your debts.
Chapter 13 bankruptcy, by contrast, establishes a 3-5-year payment plan to pay off your debts. Think of chapter 13 as not getting rid of your debt, but rather as reorganizing it so that it’s more manageable. You may escape some of your debts, but don’t have to sell your assets (read: your house) to pay your debtors.
Since chapter 13 bankruptcy is the type that will most likely keep you in your house, that is the one I will describe.
What is the process for going through bankruptcy?
You start a chapter 13 bankruptcy by filing a petition with the bankruptcy court, which will include a detailed summary of your financial situation, including a list of debts, assets, tax returns and more. You’ll have to gather all this information from your spouse also, if you’re married. You will have to pay a filing fee to the court, although the fee is nominal.
Next, the court will appoint an impartial trustee to administer the case. This trustee will monitor all the details of the case but will also serve as the disbursing agent, basically a go-between the debtor and creditors.
Once you’ve filed chapter 13, all collection actions are automatically stopped, which includes any foreclosure proceedings. It’s important that if you’re going this route, the petition must be filed before the foreclosure sale has been done.
There are a lot of administrative steps involved but the general idea is that you come up with a 3 – 5-year plan to repay creditors and get it approved by the court. The trustee will then execute the plan, collecting payments and assets from you and paying the creditors.
Chapter 13 bankruptcy is a very complicated, tedious legal process, and anyone interested in this foreclosure option should talk to a qualified attorney before proceeding.
PROS AND CONS OF DECLARING BANKRUPTCY
- You will be able to save a large portion of your assets, ideally including your house
- Any debt not included in the payment plan is legally wiped out
- Secure assets must be less than $1,184,200, which means you can’t use this option if you owe more than this on your house.
- You won’t be out of the woods until the bankruptcy is done, at least 3-5 years
- Taking on new debt will be incredibly difficult while you’re in chapter 13 (3-5 years), but it will be eliminated from your credit report after 7 years (versus 10 years for a chapter 7 bankruptcy)
- You must strictly adhere to the payment plan worked out with the court, otherwise you will lose the legal protections that chapter 13 provides
Foreclosure Option #16. Do Nothing
The default foreclosure option is to do nothing. Just wallow in your own crapulence and let the banks walk all over you. You will lose your home, your credit, and maybe more. I strongly advise against this, and since you’re here trying to find options, I assume this doesn’t describe you.
Foreclosure Options FAQ
Can you sell your house if it’s in foreclosure?
“Can I sell my house if it’s in foreclosure?” is a common question that we get. Although the bank doesn’t technically own your house, the mortgage serves as a lien on the property, which means they can control what you do with the house. Being about to sell your house in foreclosure is a matter of timing and the amount owed relative to the property value.
Timing: the closer you get to a foreclosure auction, the harder it becomes to sell your house if it’s in foreclosure. Usually people know that life changes are going to make it difficult to make the mortgage payments. The easiest would be to sell it before you even miss a payment. This will help protect your credit, minimize stress, and frankly, keep the banks completely out of the process. Once you start missing payments, you’ll get the bank’s attention. And once the bank begins foreclosure proceedings, you’re on the clock and will have until the auction to sell your house.
Amount owed: the amount owed relative to the property value will also affect whether you’ll be able to sell your house if it’s in foreclosure. If your house is worth more than what you owe, it’s pretty straightforward. Simply find a real estate agent and sell the house. The bank won’t ever be involved. If you owe more than the house is worth, things get more complicated. You’ll have to get permission from the bank to do a short sale, since you won’t be able to pay the mortgage back in full.
How does a deed in lieu of foreclosure affect credit?
A deed in lieu of foreclosure will hurt your credit score, but not as much as a short sale or foreclosure. For someone with otherwise good credit, a deed in lieu of foreclosure will drop that person’s credit score by 100-120 points. In contrast, a foreclosure will drop the same person’s score by 130-150 points.
So it’s clear that a deed in lieu of foreclosure doesn’t hurt your credit as much as a foreclosure would. On the other hand, it’s only slightly worse than being 90 days late on your mortgage, which will drop your credit score by 95-115 points.
In other words, if you’re already 90 days late on your mortgage, a deed in lieu isn’t going to affect your credit any more than its already been damaged.
How much does foreclosure affect credit score?
Foreclosure is obviously incredibly detrimental to your credit score. Not only will it severely drop the score, it will remain on your credit report for seven years. The exact amount that your score is affected will depend on how high your score was before a foreclosure. Someone with an 800 credit score will lose a lot more points than someone with a 600 credit score. There are other factors involved, but in general, a foreclosure will drop your credit score by 100-150 points. In some cases, credit scores have been reported to drop by up to 300 points! Talk about a kick in the teeth.
There may be some conspiracy theories as to why foreclosure affects your credit score so much, but the truth is, your house is where you live. If someone can’t make the payments to keep their house over their head, they probably can’t afford other, less critical payments.
What does this mean? You can still borrow if you have a foreclosure on your record. It’s just that the cost of borrowing will be much higher. You present a financial risk to any lender. They obviously want to make sure they get their money back. So loans will carry a higher interest rate, higher fees, and in some cases, simply won’t be approved.
And although a foreclosure stays on your record for seven years, you can still be eligible for another home loan before that seven years has passed. Loans backed by the VA and the FHA require a much shorter waiting period than a conventional loan. You might be eligible for an FHA loan as little as one year after a foreclosure.
How much are attorney fees for foreclosure reinstatement?
Understanding how much a lawyer is going to cost is extremely difficult. They don’t exactly have a price tag on their website. Each lawyer will charge different rates, and many might even charge different rates for each client. Here are some of the things that will affect fees attorney charges when helping with foreclosures:
Experience level of attorney.
Senior attorneys are going to charge a lot more. They should. They’ve been around the block and have seen a lot of things. You get what you pay for. In a lot of instances an attorney that charges half the price of a more experienced attorney will take twice as long to accomplish the same thing. So, in the end, you’d end up paying the exact same amount.
Complexity of case
If you have an open and shut case, or simply need help with some paperwork, you might not have to pay much. If you have a very complicated situation and intend to fight the foreclosure all the way to the Supreme Court, you will need a much more experienced lawyer.
Number of hours lawyer expects to work on case
Lawyers may quote you a rate based on how much work they think they’ll need to put in. A much larger case that will bring a lawyer lots of hours may get a lower rate than someone who just needs a few hours of counsel.
Attorneys charge in different ways. Some will charge hourly rates, others will charge fixed rates. If you’re paying an hourly rate, expect to pay several hundred dollars per hour. You should definitely ask for an estimate on how many hours the lawyer expects to spend on a case. You should also ask for some of the less expert work be done by someone on the lawyer’s team who will bill at a lower rate, for example a less experienced attorney or a paralegal.
Other lawyers will charge a contingency, which means you only pay if you win. In most situations with a foreclosure, you won’t come across this. If you’re suing the bank for millions of dollars, you might be able to find a lawyer on contingency. But in most cases you’re simply trying to fight a foreclosure. That means there’s not a lot that you’ll be able to split with a lawyer if you win.
How many missed payments before foreclosure in Texas?
You are considered in breach of your contract after one missed payment, although usually you’ll have a grace period. The exact timeline will depend on your lender. Most will begin sending you notices, warnings, and other hate mail after your first payment.
At this point, your credit score has taken a hit and you’ll begin accumulating late fees. It’s imperative that you contact the bank about your situation and take action before the situation gets out of control. If you act soon enough, you should be able to keep your house and minimize the financial destruction.
After your 3rd missed payment, or between 90-120 days delinquent, most banks will begin formal foreclosure proceedings. In Texas, the process can move pretty fast once the bank begins foreclosure. The bank will give you 20-30 days to pay the loan in full. After that, they’ll plan to sell the house and give you a 21-day notice.
So in all, if you continue doing nothing once you receive notice of foreclosure, you can then expect to have your house to be sold in less than 2 months. This is around 5 months after you miss your first payment.
This general timeline applies to most cases but a specific timeline will depend on the bank policies, local & state laws, and even the general economic environment (during a recession, banks and authorities get backlogged with foreclosures).
Even though 5 months is amazingly quick, it is still enough time to review and act upon most of the alternatives to foreclosure listed in this guide.
Can I rent my home after a loan modification?
A loan modification, whether permanent or temporary, will usually not prevent you from renting your house. Even if there is specific language in the financial documents prohibiting this, most banks simply don’t care what you do as long as you keep making payments.
It’s important to note that while you should be able to rent out a primary residence after you get a loan modification, you will probably find it difficult to do a loan modification on an investment property. This is especially true if the loan modification is through a government-sponsored program. Most of these programs are only applicable to homesteads. They are created trying to help keep people in their homes. Landlords simply won’t have the same government lifeline that a homeowner will.