Many times, homeowners in foreclosure come up to me and ask, “What are my options right now?” Right now they are facing foreclosure with the auction within a month or two. Here is my answer.
1. You can call your lender and ask him to reinstate the loan. You may be allowed to reinstate or update the loan by paying a lump sum or making scheduled payments to your lender over a specified period of time. Explain that you had a few bad months, but have now recovered and most lenders will try to fix something with you. This option generally works when homeowners are not far behind on payments and can show that they are in a better financial situation.
When they reinstate the loan, the Notice of Default (NOD) is canceled, the house is taken out of foreclosure, and everyone is happy. However, the owner’s credit was still affected by the NOD, which will hurt a bit.
Something similar to reinstating the loan is called a Forbearance Agreement. This is when you actually negotiate a “deal” with the bank. You can ask the lender if they will add the amount owed in late payments to the back of the loan, or if they would take a smaller portion up front and add the remainder to the back of the loan or pay something up front and forgive the rest. Or you could even ask them to forgive you for everything.
2. You can refinance your home. If there is a lot of equity in your home and you’re not too late on payments, this is a great option. Typically, the lender would refinance the existing loan and include the late payments and fees needed to regain control as part of the new loan. The challenge most homeowners have is that they have made the most of their home. Therefore, there is very little equity in your home, especially when you add late payments and fees, making it very difficult to refinance. This is one of the reasons California has one of the lowest foreclosure rates in the nation, because home values rise so fast that homeowners can refinance pretty easily if they ever get into trouble.
3. You can list your home with a real estate agent. If you have equity in the property, this can also be a great option. However, if you have little or no equity, which is often the case, it can be difficult to sell a home quickly with a real estate agent. It is practically impossible when the house is over-leveraged. The reason is because you have to pay a real estate agent fee or commission when your home is listed. It is usually 3 to 6% of the purchase price. Real estate agents have to increase the purchase price of the home to offset their commission and pay off the loan balance. If the foreclosure auction is coming up, they have to find a qualified buyer quickly, and this usually takes time.
4. You can sell the house yourself. All you need to do is put up a FOR SALE sign in your front yard. You should tell everyone that you are selling your house, maybe you know a friend or family member who is looking to buy in the neighborhood. If you live in a high-traffic neighborhood with listings, chances are people will call you. Again, if your home is over-leveraged, you will have a hard time selling your home quickly.
5. You can return the property to the lender. This process of transferring ownership from you to the lender in these circumstances is called Deed-in-Lieu of Foreclosure and is sometimes called “friendly foreclosure” because, in essence, that is what it is. Just go. A deed in lieu of foreclosure does not protect your credit or cut off the rights of minor lien holders. In other words, the lender would repossess the property subject to the lesser lien holders. This will avoid the possibility of a deficiency judgment in the event that the property does not produce enough to cover outstanding debts after your auction. So if you have equity in the property, this is not a good option. You will waive all rights to receive any surplus from the auction. Using this option is like giving up. Don’t give up when you still have better options.
6. You can sell your home to an investor. Most investors will negotiate with their lender to accept a discount on their loan. This is called a short sale. What this does is allow the investor to buy your home below market value so that you can avoid the foreclosure auction and then turn around and sell it for a profit.
7. You can file for bankruptcy. There are several different “chapters” to bankruptcy. Some are exercises, others are eliminated, but this is the general idea. When someone files for bankruptcy it is almost as if someone builds a “bulletproof” barrier around the house. No one can touch you! However, it is not free from all responsibility and most people do not understand it.
[Note: Bankruptcy should be the last alternative or option and should not be used to stop foreclosure unless you have no other option or else you need the protection of a bankruptcy due to other circumstances or situations you are currently up against. If you feel this may be your best option, please seek legal advice from a competent professional in this field.]
8. And finally, you can let it go to foreclosure. You basically do nothing. They will usually evict you after about 2-3 weeks. You walk away with nothing in hand and a foreclosure on your credit report. This is without a doubt the worst option of all. Don’t let anyone convince you to give up and do nothing. At least try something. You’ve got nothing to lose. At this point there is nothing worse that can happen to you.
