As foreclosures reach an all time high in the U.S. it is important for homeowners to quickly arm themselves with the most information when facing a foreclosure. No one can make the right decisions without the right knowledge first. This article will walk you thru all of your options and provide you with the tools and knowledge to make the right decision about avoiding a foreclosure.
Let’s first start with understanding your options.
KEEP YOUR HOME
OPTION 1: REINSTATE YOUR LOAN The option of reinstating your loan is available to homeowners who can demonstrate to a lender that they have available funds to pay back the outstanding balance on their mortgage in a short time. This solution works best for homeowners who can make up their total past due balance through a combination of lump sum payments and/or “extra" payments (spread out over a 12-24 months) in addition to their regular mortgage payment.
To better understand the steps you may have to take to reinstate your loan let’s first look at the different options you have for reinstating your loan.
Total Reinstatement: This process involves bringing your loan current in one payment. You will be required to provide a certified check that will include all past due payments, late charges and any fees and costs, which have been assessed to your account.
Repayment Plan: This process involves making up the amount past due over a period of months by paying a full payment plus a partial payment on the past due balance each month. You will be required to give your bank a cash contribution equivalent to 30-50% of your total arrears (total of late payments, bank fees and attorney’s fees).
Forbearance Plan: This option involves reduction or suspension of payments for a period of time followed by a period of time during which the deferred payments are made up, similar to the repayment plan.
Loan Modification: This option includes changing the original terms of the mortgage through one or a combination of the following methods: increasing the loan balance to cover the delinquent interest and/or increasing the number of payments to pay off the entire loan. A loan modification requires the prior approval of the investor. A modification fee will be charged as well as a cash contribution toward compliance with any additional requirements of the bank and/or investor.
Partial Claim Program: Certain loans qualify for this program, in which the homeowner is required to give cash contribution equivalent to 30-50% of total arrears, and the remainder of the arrears is loaned to the homeowner interest fee. The homeowner will have the remaining term of the mortgage to pay off this loan in full.
The PROs of choosing this option is that it helps you keep your house and avoid a foreclosure. You also avoid filing for bankruptcy, and do not have to pay lender fees and try and refinance your home. You get to keep your original loan, which is especially helpful if you negotiated a good interest rate when you originally took out the loan.
The CON’s are that you will have to come out of pocket with some funds to get into a plan. This is usually a minimum of 30% of the outstanding total past due balance, but could be as high as 50%. Obviously, if you don’t have the funds, foreclosure reinstatement is not an option for you. Furthermore, after you send in the funds, the remaining outstanding past due balance is the added onto your loan amount, and spread out over anywhere between 6 and 24 payments (months). Make sure before you enter into a foreclosure reinstatement plan, that you have the funds available to get into the plan, and also to continue making the new, higher payments.
OPTION 2: REFINANCE
Sometimes the best option for an individual or family facing foreclosure is to refinance their loan. In today’s quickly changing mortgage environment there is usually a loan to meet your needs. However, refinancing your loan isn’t always the best solution given your specific situation.
The obvious PROs to this option is that you can stay in your home and possibly create more financial freedom. Additionally, if you have a competent mortgage broker, he or she should be able to set your closing date so that you get to “skip" a mortgage payment. This month of “no mortgage payment" is often exactly what someone needs to get him or herself back on track financially.
Refinancing can be a long and difficult process especially if you are already one or two payments behind on your mortgage. Unfortunately the CONs of refinancing often times outweigh the PROs.
Some of the CONs of refinancing include:
Up front out of pocket cost for an appraisal: While you have to pay for an appraisal anytime you refinance your loan, the key in a foreclosure situation is that the loan to value (LTV) requirements be met. Lenders are very strict about only refinancing when a LTV meets their guidelines. If your appraisal does not fall within the LTV guidelines that the lender has set then they will not underwrite your loan. So you might pay for an appraisal ($350-500) and not be able to use it. If you try and refinance with another lender, they most likely will want their own appraisal done, so you can see that appraisal fees can begin to add up very quickly.
Lender and broker fees that get added onto your loan balance can eat up your equity: Many times in a foreclosure refinance, you are required to pay points. One point is equal to one percent of the loan amount. So if you are borrowing $250,000, and the broker is charging you 2 points, that is an extra $5,000 you are paying just in broker fees. Then you must also add in all of your possible closing costs: settlement fee, lender fee, underwriting fee, transfer tax, recordation charges, title insurance and credit article, just to name a few. Do not be surprised if your closing costs alone add up to ten, fifteen, maybe even TWENTY THOUSAND DOLLARS.
(NOTE: closing costs differ from State to State).
A new, bigger payment: Your loan balance is going to increase: you are borrowing enough to pay off the loan, and all of the late fees, and attorneys’ fee that come along with a foreclosure. Add to the fact that your credit score is much worse now than when you originally got the loan, and you are going to be paying an increased interest rate on a larger loan amount. There are some instances where families have refinanced into a new, bigger payment, and they could handle it. Most of those instances usually were based on short-term job loss, or perhaps a medical emergency that had to be paid for. This bigger payment is always an important consideration when refinancing.
Now that you understand the PROs and CONs of refinancing, the most important thing you must remember when considering refinancing is to
make sure you carefully read all the paperwork before the closing! Don’t get to the closing table to find out you have a pre-payment penalty and additional closing costs you did not anticipate.
If you decide that refinancing is your best option it is important to make sure you find the right person to help you out. It is surprising how many homeowners just turn on their computers and start searching the Internet in search of a new loan. You will want to work with a local broker or bank that understands your area and you can deal with on a local basis.
OPTION 3: BANKRUPTCY The final option available to a homeowner facing foreclosure is to file for bankruptcy. This option should
always be the homeowner’s last resort.
If the homeowner chooses to file for bankruptcy the PRO is that the homeowner can sometimes stay in his or her house, and some, but certainly not all debts can be forgiven. Unfortunately there are bigger CONs to this option. A bankruptcy will be on the homeowner’s permanent record and the mortgage payments could be higher than before.
If you do choose to file for bankruptcy you need to inform yourself of the impact of what this will do to your long-term financial status. It is important to work with someone in your community who is a licensed bankruptcy attorney.
(Note: Bankruptcy laws differ by State and you should consult a bankruptcy lawyer regarding how a bankruptcy will affect your financial situation and future).
SELL YOUR HOME
OPTION 1: SELL TO AN INVESTOR Oftentimes homeowners have reasons to want to get out of their home quickly and avoid a foreclosure with the least amount of work and risk. For these people selling to an investor may be their best option.
The obvious PROs to selling to an investor is that the homeowner can close quickly; sell their house in “as-is" condition with no contingencies (retail buyers are going to want things fixed, and will require a home inspection, etc); oftentimes be paid in all cash and immediately halt the foreclosure as soon as the title is transferred; and sometimes the homeowner will find flexibility on their move out dates.
The CONs of choosing the option of selling to an investor is that you will have to move to a new home and you will not receive retail price with all cash offers. Some investors may be able to provide you with full retail value if they can find equity in the house upon rehabbing the property or purchasing your home subject to your existing mortgage.
Selling to an investor is usually the quickest and easiest option to avoid a foreclosure while retaining some equity in the home, if any exists. If you consider selling to an investor you should work with someone who invests in your community who knows your market and can facilitate a quick and smooth transaction.
OPTION 2: LIST WITH A REALTOR Listing with a realtor can sometimes be a good option for people who have time on their side and a house in a desirable market in good condition. The obvious PRO of listing with a realtor is that you might get “market value" for your home, assuming you want to move.
The obvious CON of listing with a realtor is that you will have to pay the realtor’s commission. Remember that the seller usually pays BOTH the listing and buyer’s agents’ commissions. This frequently can cost 6% or more. Imagine if you sell a $300,000 property
- that is $18,000 in commissions alone! Furthermore, as the seller, the homeowner must first make the house look presentable, deal with buyers and be willing to show their home at all times with no guarantee anyone will buy the home in time to stop the foreclosure. If you are lucky enough to get an offer, remember that buyers are picky people, and will make an offer subject to a home inspection. The inspector will spend 3-4 hours going through your home with a fine-toothed comb. If they find anything “wrong" with your property, be prepared to fix it, and to have the funds available to do the repairs (or hire a professional to do them for you). If you are already behind on your payments you may not have the time to list your home with a realtor.
If you have the time and ability to list your home with a realtor you want to work with a realtor who knows your market area and can help you get top dollar for your home.
OPTION 3: WORKOUT AGREEMENT Individuals who may want to consider a “workout agreement" are those who have little or no equity in his or her home. During a “workout agreement," a qualified professional contacts your mortgage company on your behalf to enter into a workout agreement. He or she negotiates a payoff of the property if you owe more than what it is worth.
The PROs of the “workout agreement" is that the homeowner can sell his or her property rather than go through foreclosure. The CONs are that the homeowner must go through the process with no guarantees. A “workout agreement" takes time with no cash for the homeowner and then you still must move out of your home. However, in some cases, this is a good option for individuals facing foreclosure.
If you decide that a “workout agreement" may be the right choice for you, you need to make sure you have a professional working with you who understands “workout agreements" and can help you negotiate with your bank. Of all the options, this option can take the longest and provide the least reward. But for some, it may be the only option.
Now that you understand all of your options it is important to analyze your options against your personal situation and create a plan to help you avoid a foreclosure. Your plan should provide you a road map to avoiding a foreclosure and achieving your short and long-term goals. Your plan should also outline the options available to you, ranked from first to worst. While you might have an option that sounds great to you (i.e., refinance), it is not always going to be available to you, and you will need a Plan B, Plan C and probably even a Plan D. Having a plan is critical to successfully dealing with your problem, yet most people never get around to doing much, if any, planning first.
Once you have created your plan you will need to f ind the right people to help you implement your plan. You may need: an Attorney to review the foreclosure filing or help you file for bankruptcy; a Mortgage Lender to assist you with refinancing; a Realtor to list your house for sale or assist you in finding a new home or rental upon the sale of your current home; an Investor to purchase your home from you quickly; or a professional who can help you with a “workout agreement" or foreclosure reinstatement.
It is better to work with a team of individuals who can help you objectively analyze your options and determine which is best for your unique situation. Do not forget that when working with an individual who can only offer his or her solution to you (mortgage broker, realtor, bankruptcy attorney) they probably have their own personal agenda in mind, along with a solution for you, and may not tell you other solutions available to you, or the cons of the solution that they suggest.
Homeowners today no longer have to face a possible foreclosure alone - there are now teams of individuals who help homeowners stop their foreclosure and move on with their lives by providing numerous options to meet an individual’s needs.
If you would like further information and to speak to someone about what options might be right for you please visit
http://www.savemefromforeclosure.com
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