What are the Options of Homeowners Facing Foreclosure?

1.Loan Modifications.

What is a Loan Modification?

Loan Modifications are changes to your loan agreement. Your payments get more affordable, and you don’t have to default on your loan. Banks choose to offer loan modification programs because it is easier to work with you than to go after you.

Why do Banks Offer Loan Modification?

If you stop making payments, the bank has several options.

• Attempt to repossess property (a home foreclosure)
• Attempt to collect, or hire somebody to do so
• Give up hope and accept the loss
• Watch you declare bankruptcy and receive little or nothing

None of these options are attractive to you or the bank. Your credit will suffer, and there’s a financial cost to the bank.

Is there another option?

Yes - banks offer loan modification so that they don’t have to do any of the above. Loan modification can be less expensive and more profitable for banks, but not in every case.

How do I Get a Loan Modification?

To get a loan modification you generally have to ask. Call the bank and let them know about your financial situation. Just be honest and explain whether or not you’ll be able to make your payments. If they agree, you may qualify for a loan modification.

Banks have different criteria, so there is no way to know ahead of time if you’ll qualify for loan modification - you just have to ask.

What Types of Loan Modifications Exist?

Banks can change the terms of your loan to make the payments more affordable. These changes may be permanent or temporary. In any case, the result is a more manageable payment.

There are several ways they can accomplish this:

• Refinance the loan
• Allow you to skip payments, and add those to the end of your loan
• Reduce the total amount of your loan (forgive principal)
• Reduce the interest rate charged
• Extend the loan term

2. Reinstate the Loan.
You can call your bank or lender and ask them to reinstate the loan. You may be allowed to reinstate or make the loan current by paying a lump sum or making scheduled payments to your lender over a given amount of time. Just explain to them you had a few bad months and things are now better and most lenders will try to work something out with you.

Here is an example:
Ed falls behind 3 payments on his house. He pays $2000 a month for a mortgage payment. Then we add on $500 in late fees. Ed owes a total of $6500 to reinstate the loan. He sells a bunch of his personal belongings for $10,000. So he pays the bank, they say "Thank You", and Ed continues to make his regular monthly mortgage payment. The Notice of Default (NOD) is canceled, the home is brought out of foreclosure, and everyone is happy. However, Ed's credit was still hit with the NOD which will hurt a little.

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 bank if they will add on the amount owed in back payments to the back of the loan. You could even ask if the bank would be willing to take a smaller portion upfront and add the rest to the back of the loan. Another option is to ask to pay some upfront and forgive the rest. Or you could even ask to forgive the whole thing. You never know unless you ask. Banks want to work with you, trust me.

3. Refinance.
You can refinance your home. If there is lots of equity in your home and you're not to far behind on payments, this is a great option. Usually the lender would refinance the existing loan and include as part of the new loan any late payments, and fees that you would need to regain control. It would all be "wrapped" into one mortgage. The challenge that most homeowners have is they have leveraged their home to the max. Therefore, very little equity is in the home especially when you add on back payments and fees so it becomes very difficult to refinance.

4. List Your Home with a Realtor.
You can list your home with a realtor. If you have equity in the property this can be a great option. However, if you have very little equity, it is very hard to sell homes with real estate agents. The reason why is because you have to pay a realtor fee or commission if they list your house. Typically it's 4-6% of the purchase price. Then what happens is they increase the purchase price of the home to compensate for the commission and now it becomes practically impossible to sell your house when it's at or over market value in such a short time. Plus, buyers cannot qualify for loans if the home is selling for more than what it's worth. You would be better off to try and sell it yourself.

5. Sell the House Yourself.
You can sell the house yourself. All you need to do is put a FOR SALE sign in your front yard. If you go this route, you should tell everyone you are selling your home, maybe they know a friend or relative who is looking to buy in the neighborhood. If you live in a high traffic neighborhood with listings, you have a very good chance people will call you. In the meantime, as a backup plan, "just in case" you can sell your home to us, we can try to discount the loans so we can buy it. Yes, we also buy houses, and if we are successful, you leave with cash in your pocket and a foreclosure off your record.

6. Relinquish the Property.
You can give the property back to the lender. If there are no other liens on the title, the lender may agree to take the property back. This process of transferring ownership from you to the lender under these circumstances is called a Deed in Lieu of Foreclosure, and is sometimes referred to as a "friendly foreclosure" because in essence that what it is. You just walk away. A deed in lieu of foreclosure does not protect your credit, nor will it cut off the rights of junior lien holders. In other words, the lender would take the property back subject to the junior lien holders. This will avoid the possibility of a deficiency judgment in the event the property fails to produce enough to cover the outstanding debts after it goes to auction. So if you have equity in the property this is not a good option. You will give up all rights to receive any surplus from the auction.

7. Sell to an Investor.
You can sell your home to an investor who will negotiate with your lender to accept a discount on your loan. This is called a short sale. What this does is allow an investor to buy your home under market value so you can avoid the foreclosure auction. Then they can help you move and get you into a place that will fit your needs.

8. File Bankruptcy.
You can file bankruptcy. It is very important you understand how bankruptcy works. Many people use bankruptcy as a scare tactic. There are several different "chapters" of bankruptcy. Some are work-out others are wipe-out, but here is the general idea. When someone files bankruptcy it's almost like someone builds a "bullet-proof" barrier around the house. No one can touch you! However, you are not free of all responsibility and most people do not understand that. We are not a bankruptcy attorney, but you need to know the difference between a Chapter 7 and a Chapter 13 bankruptcy so you know what happens.

Like we mentioned earlier, some bankruptcies are "work out" others are "wipe out". The two that we will focus on are the Chapter 7 and Chapter 13. These are the most common in your situation. Chapter 7 is the "wipe out" and Chapter 13 is the "work out". Bankruptcy is a federal court action designed to help individuals repay their debts or eliminate their debts depending on their circumstances. Chapter 13 bankruptcies are designed to reorganize debts in an effort to repay all debt. Chapter 7 bankruptcies are geared more towards liquidation of assets. Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action against you.

Here is how Ch 7 works:
When someone files a Chapter 7 bankruptcy, all assets are frozen. The attorney will create what is called an automatic stay. Meaning everything "Stays" put. The homeowners can't buy anything, they can't sell anything, and they can't even give away anything. If they try to sell their home, they couldn't. If they try to give away money in savings, they can't. Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.

If the homeowners are in the middle of foreclosure, a Chapter 7 will stop the foreclosure process. Usually banks will then ask the trustee to release the property from the automatic stay so they may continue with the foreclosure process. Once the property has been released from the bankruptcy, the foreclosure process starts right where it left off. Typically you have anywhere from 3-5 weeks until the foreclosure process begins again.

Chapter 13 is a little different.

When someone files a Chapter 13, they don't take all the assets and sell them. Instead they take all the monthly payments and discount them for penny's on the dollar. It's like a debt consolidation plan. Whatever amount is agreed upon has to be paid to the bankruptcy count every month for the next 3-5 years. So the homeowners get to keep their house, their cars, and all their assets. Now, as long as the homeowner stays current with the mortgage payments and pays the amount agreed upon, they will be fine. However, if any payments are missed, the trustee will dismiss the bankruptcy and the foreclosure process will begin again.

[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 advise from a competent professional in this field.]

9. Nothing.
And finally, you can just let it go to foreclosure. Basically you don't do anything. Typically you will get evicted after about 2-3 weeks. You leave with nothing in hand and a foreclosure on your credit report. This is without question the worst option of all. Don't let anyone convince you to just give up and do nothing. At least try something. You have nothing to lose. It could mean the difference between a few thousand dollars in your pocket compared to nothing and a foreclosure on your credit.

You should also beware of one other thing that can halt foreclosure. It is called the Soldier Relief Act of 1940. When a property is owned by a person who is in the military and the mortgage payments are not made, then this relief act may stop foreclosure based on certain criteria. The person has to be in active duty in order to qualify. The mortgage loan had to be established before the soldier was called out to active duty. Not only will this stop foreclosure, but it will stop seizure of any personal property while the soldier is actively serving and several months thereafter.

We hope with this knowledge, you now can make the right decision about your home.