Exactly, what are my foreclosure options?
Glad you asked! There is so much confusing information, scams and cheats that are happy all day long to take your money. Just exactly what are the options? Here are the options in simplified and easy to understand terms.
Once a homeowner misses a payment and then moves on to missing a second and then a third,
the lender files the foreclosure notice. When this happens the lender and the homeowner have
a few options.
Sell
If the property has equity the homeowner can simply sell the property outright and keep whatever
equity is left over after closing costs and real estate agent commissions are deducted. In most
foreclosure cases the homeowner has no equity.
Short Sale
The homeowner could sell the property to a buyer and negotiate a short sale on the mortgages
and liens provided the purchase price is not enough to cover the full loan balances or all mortgages
and liens. The amount owed on these liens might have to be negotiated to allow the property
to transfer. Otherwise the full payoffs of the loans would cause the homeowner to be “up side
down” on the loan balance. In this case the homeowner or seller would have to bring funds to the
closing table to pay off the loan in full.
Remember, a short sale takes place any time a property sells for less than
what is owed and the lender accepts a discounted settlement payment, even
though it may not be enough to cover the full loan balance. A short sale
must be an arms length transaction. In most cases the homeowner is not
allowed to receive any money from the short sale. In a few selective cases
the homeowner may receive compensation from the foreclosing lender. The
short sale approval letter issued by the mortgage company will stipulate if
the homeowner is allowed to receive any money at closing.
Repayment Plan
The third option for the lender is to work out a repayment plan of some kind. Forbearance plans
and loan modifications are typical repayments plans.
Forbearance
A forbearance plan would consist of a written plan to repay the back payments (arrears) that
are owed based on the mortgagor’s ability to pay the new installment payment. A forbearance
plan payment typically includes the current planned payment plus a percent of the arrears owed.
In almost every case the homeowner’s payment will increase dramatically. Most forbearance
plans fail. Homeowners simply do not have the extra money to make the larger payment.
Loan Modification
Another form of repayment plan is a loan modification. A formal loan modification is a permanent
change in the terms of the mortgagor’s loan. An example would include a change in the interest
rate of the loan. Another example would be an extension of the loan term. Loan modifications
cause a re-amortization of the loan with a new payoff
schedule. It structures the loan is such a way as to give the
homeowner a payment they can afford. Lenders do this to
allow the homeowner to get back on their feet and begin
the mortgage payments again.
Partial Claim
A partial claim is an advance of money to the homeowner or mortgagor for the payment of the
arrears. This money would be applied to the past due balance and reinstate the delinquent loan.
A subordinate mortgage and note in the amount of the loan is then attached to the property as a
junior lien. This option is only available for HUD loans. (See www.hud.gov for additional details)
Deed-in-Lieu
Another Option for the lender is to pursue a deed-in-lieu of foreclosure. A deed– in–lieu is a plan
whereby the homeowner gives the deed to the property back to the foreclosing lender. This
program ends the civil lawsuit against the homeowner. In some cases the homeowner will receive
compensation from the foreclosing lender for participating in this plan. A written report of the
condition of the property must also be signed off by both parties. In the deed-in-lieu program the
foreclosing lender is able to save a significant amount of time and money because the foreclosure
process ends quickly. The disadvantage for the homeowner is that this program is still considered
a foreclosure and will damage their credit report. A deed–in–lieu is truly a last option if a short
sale fails.
Foreclosure Auction
If all of those options don’t work, the lender can force the
auction of the property and liquidate the house to the highest
bidder. This is typically done through a sheriff’s or trustee’s
sale. In most areas of the country these auction style sales
are conducted on a monthly basis. In major markets these
auction sales are done weekly. The bidding starts at 2/3 of the sheriff’s or trustee’s appraised
value in most areas. The value is determined by an exterior drive-by appraisal.
Bank Owned
Last, the bank can repossess the property if the
auction does not generate a high bid. In this
case the lender would repossess the property
or “buyback” the property at auction. The
property is then considered real estate owned
by the bank or an R.E.O. The lender would
then hire a real estate agent to sell the property. In
most cases the buyer of these REOs is an investor willing to take on the
risk of rehabbing the property.
