Consider All Your Foreclosure Options

By Ralph R. Roberts

When facing foreclosure, most homeowners think they have two options — pay up or move out. The fact is that you probably have about a dozen options — everything from refinancing to loan modification to selling your home or simply walking away and abandoning the property.

Although I recommend loan modification for most homeowners who qualify for it, I strongly encourage you to consider all your options, so you can make a well-informed choice of what’s best for you and your family. Although each homeowner’s situation is unique, the following list introduces you to the most common options:

Loan modification: Also called a mortgage modification, loan modification enables you to negotiate a workout solution with your lender to catch up on late or missed payments and lower the monthly mortgage payment by adjusting the terms of the loan. Your lender may be willing to lower the interest rate and extend the term (and perhaps even reduce the principal, although this is rare) to make your monthly house payment more affordable and help you catch up on any past due amounts. This is currently one of the best, most available, and most popular options.

Forbearance: Forbearance provides you with a payment plan for catching up on missed payments. You’re typically allowed to pay a few hundred dollars extra each month over the course of 18-24 months to catch up.

Reinstatement: If you can borrow the money needed to pay any balance that is currently overdue, your lender may reinstate the loan, allowing you to continue making monthly payments as though nothing ever happened. (This is a practical option only if you have recovered from a temporary financial setback and can now afford the house payment along with any payments required to pay back the new loan.)

Refinancing: Given the fact that credit is still pretty tight right now (as of Feb. 2009), this option may not be available. If you can qualify for a fixed-rate, low-interest loan to pay off a higher interest loan and perhaps even consolidate your debts, refinancing could be one of your best options.

Short re-fi: With a short re-fi, your lender agrees to accept as payment in full less than is required to pay off the balance due on the mortgage, and you take out a refinance loan to make that payment in full. The end result is that you have a new mortgage with a lower balance and lower monthly payments.

Government loan programs: The federal government, through FHA, offers down-payment assistance programs and is developing other programs to enable homeowners to keep their homes. Contact your local HUD office to find out what’s currently available.

Bankruptcy: If you’re buried in unsecured debt, including credit card debt, bankruptcy may be the best option. Even if you’re not considering bankruptcy, it’s a good idea to consult with a bankruptcy attorney to explore this option. It could be the best option for you.

Selling the home: If you cannot or do not want to keep your home, selling the home to “get out from under it” may be the best option. Contact the best real estate agent in your area to list your home for sale; the best real estate agent is usually the one who has the most SOLD signs in the neighborhood. The two drawbacks of selling your home are that you may not have enough time, and if you’re selling in a down market like the one we’re experiencing right now (in Feb. of 2009), you could face the unpleasant possibility of having to sell at a loss.

Short sale: If you’re facing the prospect of selling your home at a loss, you may be able to negotiate short sales with lenders who have liens on your property. With short sales, the lenders agree to accept as full payment a partial payment of the loan. In most cases, lenders are more likely to go along with the idea if you already have an offer from an interested and qualified buyer.

Selling to an investor: Private real estate investors may be able and willing to buy your property at auction or redeem it after the auction and lease it or sell it back to you. Be careful dealing with private investors, however. Have a qualified real estate attorney review the case before you make any decisions or sign anything.

Deed in lieu of foreclosure: If you are unable to make payments (even significantly lower payments) and cannot sell the property and at least break even on a sale, your lender may accept the deed in lieu of foreclosure. Hire an attorney, however, to make sure the deal allows you to walk away totally debt free and prohibits the lender from seeking a deficiency judgment. Your lender may even be willing to pay you a small amount in exchange for keys and leaving the property “broom clean” or allow you to stay in the home rent free until it sells.

Redemption: If you live in a state that allows redemption, you have the right to buy back the property after the auction by paying the buyer the purchase price along with any qualifying expenses the buyer paid for. Check with a real estate or foreclosure attorney in your area or your county’s register of deeds office to determine the redemption rights in your state.

Abandoning the home: Walking away is an option but it is not always the best option, because it can leave some legal strings untied. In some jurisdictions, for example, your lender can sell the house at auction and then pursue a deficiency judgment against you for the difference between what the house sold for and the balance of the mortgage.

Do nothing: One of the worst options (second only to being victimized by a foreclosure rescue scam) is to do nothing, in which case you lose your home along with any equity you may have had in it and have to go through the humiliation of being evicted.

When you’re facing foreclosure, the clock keeps ticking. The sooner you take action, the more options you have and the more time you have to explore those options. I strongly encourage you to pursue multiple options at the same time:

• list your home for sale
• meet with a mortgage broker to explore refinancing options
• consult a bankruptcy attorney 
• contact your lender to find out about additional options. 

This gives you a plan A, B, C, and D, so you have something to fall back on if your plan A unravels.

Tip: Remain patient and persistent. Your situation may seem like the end of the world, but many homeowners have faced the same fate, and regardless of the outcome, almost all of them manage to put the bad times behind them and move toward a better future.

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About the Author: Ralph R. Roberts, GRI, CRS, is a real estate-focused consumer advocate, blogger, host of Keep My House Radio, and the award-winning author of numerous books, including Foreclosure Self-Defense For Dummies and the forthcoming title Loan Modification For Dummies (available summer 2009). Ralph is based in Sterling Heights, Michigan, and can be reached here.