A typical homeowner today has to deal with a great many more economic forces than just about any other time in history. Markets are volatile, jobs are uncertain, and there are any number of factors that could derail your financial goals and obligations and prevent you from making your monthly mortgage payments.
At any time you could find yourself without the means to make your mortgage payments, and having to consider the possibility of the bank foreclosing on your home. If things get really bad you might consider just walking away and letting the house go. Maybe starting over.
Walking away from your debts is not a good idea.
Having a foreclosure on your credit report will make it exceedingly difficult to actually start over. It will be nearly impossible to get a loan or buy a home for many years. You might even find it hard to qualify for a decent rental or apartment unit.
The message a foreclosure sends to your creditors is, basically, you just decided not to pay your debts. Why would they think things will be different if they trust you now.
And Finally, a foreclosure does not wipe out all of the debt from a property. After the sale of the house, the primary lender is paid first but if that takes all of the money or there isn’t enough to pay off the loan, you are still responsible for any further liens on the property.
There are several ways you can potentially avoid a foreclosure situation.
The first thing to remember is that the bank does not want your house. They are simply not in the business of buying and selling real estate.
Not only that but going through with a foreclosure process costs the bank time and money. While they will generally tack any foreclosure expenses to your principal, more often than not, they would prefer to avoid the headaches altogether.
- Bankruptcy: You might be thinking, what’s the difference? Isn’t bankruptcy just an official way to walk away from your debts? Depending on how it’s done and what type of bankruptcy you seek, bankruptcy is more like a way of helping you to mitigate your debts while at the same time showing that you are acting in good faith toward your creditors by agreeing to some sort of repayment plan.
In most cases, it is much better to have a bankruptcy on your credit report than a foreclosure.
Unfortunately, if you are unable to meet the obligations of the bankruptcy, the lender might end up foreclosing on your property after all. In which case you could end up with the bankruptcy and a foreclosure on your record.
- Forbearance: Since the bank doesn’t actually have any need for your house, they may be inclined to help you through a financially rough time by issuing you a forbearance, or a temporary pause on your mortgage payments, in hopes that things will get better in the near future. This pause will give you a break from making payments without incurring any monthly fees for non-payment. You will be responsible for the payments you skipped eventually so make sure that you understand the terms of the forbearance. You might want to have a professional look at the agreement as you don’t want to be hit with a lump payment at the end of the pause to make up for the missed payments.
- Loan Modification: If the current mortgage payments are simply too high for your current situation, a lender might modify the terms of the original loan to reduce what you have to pay on a monthly basis. This could mean changing the principal, interest, or length of the loan. The lenders will modify a loan at their own discretion, and while they will usually take any situational hardships into consideration, it’s good to remember that the lender is in business to make money, and will always look to set the terms of a loan to their advantage.
- Reinstatement or Refinance: This is very similar to a loan modification but much rarer as it can be hard to qualify. Unfortunately, the very financial situation that might make you seek a refinance could hold you back from qualifying for it.
- Equity Sale/Short Sale: Prior to the foreclosure, you could sell the property yourself and use the proceeds to pay off what remains of your mortgage. Any money left over you can keep.
You have avoided the foreclosure and have some money too, either put down on a house you can afford to buy or find a rental until your situation improves
Most of the time you will want to sell the property fast and pay as few fees as possible. There are real estate investors that will give you an offer in a day or so and close within a couple of weeks. You may not get the best price for your house but you will be able to cover your debts pretty easily.
If you owe more on your house than what it will sell for, you can talk to your lender about agreeing to a short sale. If the lender wants to avoid the long-drawn-out foreclosure process and agrees to this, they will take whatever you can sell the house for (within reason) and then forgive the remainder of the debt. You don’t make anything on the deal but you avoid having the foreclosure on your record. You can move forward with a clean slate.
- Deed in Lieu of foreclosure: Sometimes called Cash for Keys, this is a situation where the bank simply agrees to take your house and then forgive the debt. You will typically be given 30-60 days to move out, but then the bank owns your house. You avoid the foreclosure and the hassle of selling your house. The bank avoids the lengthy financial headache of the foreclosure process.
The important thing to keep in mind is that the bank is not trying to get your property.
If the bank does foreclose on your house, to get their money out of it they will have to sell it. This means that they have to pay to have the house fixed up, they have to pay for real estate agents to sell the house, and they have to maintain all the taxes, utilities, and insurance until the house is sold. This is a process that could take many months.
It is normally in the mortgage lender’s best interest to help you in finding a mutually beneficial way for you to pay your loan and even keep your house.
In any case, you should never wait until the last minute to figure out what to do. If you see a problem on the horizon, you will do much better with it if you start the processes as soon as possible. It may be embarrassing to talk about financial problems with the bank, but it’s so much better than losing your house or ruining your credit for years to come.