Avoiding Foreclosure in Today's Market
By Rob Henery
In today's volatile real estate market, many homeowners are struggling to make their monthly mortgage payments. In fact, it's reached record levels. Homeowners find themselves in a position they never could have imagined: facing foreclosure.
If you are a homeowner facing foreclosure, there are some options:
- Short Sale
- Repayment Plan
- Deed-in-Lieu of Foreclosure
- Loan Modification
Let's take a closer look into each of these options.
Short Sale
10 years ago, the term "short sale" was not a well-known term. In today's environment, most people know what a short sale is. Simply put, a homeowner sells their house to a buyer for less than the amount owed on the mortgage. The mortgage lender takes a "short" payoff to satisfy the loan. For instance, if the homeowner owes $100,000 and the house is sold for $80,000, the lender takes a $20,000 loss.
Why would the lender agree to do this? It's more cost-effective for them. If they continue to pursue a foreclosure, racking up legal and holding costs, and then get the property back after the foreclosure is finalized, they will often sell the property at a lower price anyway. So they may end up selling it for $80,000 (or even lower) in 6 months to a year, rather than just taking the $80,000 now and cutting their losses.
Repayment Plan With a Repayment Plan, the lender gives the homeowner a chance to catch up the past-due amount by spreading out the past-due amount over a period of several months. This solution is for homeowners who experienced a temporary setback and now have re-stabilized their income. For example, if the monthly payment is $700.00 and the homeowner is 6 months behind, a total of $4,200.00 is past-due. With late fees and possible other fees, the past-due amount can be up over $5,000.00. The lender may structure a repayment plan based on paying back the $5,000.00 over a 24 or 36 month period.
Deed-in-Lieu of Foreclosure
This option allows the homeowner to "walk away" from their home by giving the deed to the lender. The lender takes the deed in lieu of foreclosing on the property. The homeowner benefits by avoiding a foreclosure on their credit report, and the lender benefits by not going through the costs associated with a full-blown foreclosure.
Loan Modification A Loan Modification changes the original terms of the mortgage loan. There are many variations of the Loan Modification, including modifying the interest rate, extending the loan term, and/or adding missed payments to the loan balance.
This option is best for homeowners who can still afford some sort of monthly payment, but not necessarily the full payment. A good example of this is when a homeowner has an Adjustable Rate Mortgage (ARM). Often times with ARM loans, the interest rate adjusts upwards, and the payments increase accordingly. The Loan Modification could switch the loan back to a fixed interest rate at a more affordable monthly payment.
