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9 Alternatives to Foreclosure – Things to think about before you “Just Walk Away.”

Before you decide to “Just Walk Away,” here are some alternatives that you might not have considered that could reduce the negative impact to your credit score, and allow you to get back in the housing market sooner.

1. Loan modification – The lender and the homeowner agree to change one or more of the original terms of the note in order to make payments more affordable. (Be careful when hiring a loan modification company!) Common loan modifications include:

• Adding missed payments on top of the existing loan balance
• Turning an adjustable-rate mortgage into a fixed-rate mortgage
• Extending the number of years the homeowner has to repay the loan

2. Forbearance – This allows the homeowner to pay less than the full amount of their mortgage payment temporarily for a prescribed period of time. Forbearance might be considered if the homeowner can show there is some source of future income that will bring the mortgage payments current.

3. Reinstatement – The homeowner brings current the amount they are behind, usually by an agreed upon date. A reinstatement is often in conjunction with forbearance.

4. Repayment plan- The lender gives the homeowner an agreed upon period of time to repay the amount they are behind by combining the homeowner’s delinquent portion along with their regular monthly payment. At the end of the repayment period, the homeowner should then be current.

5. Refinance – Refinancing requires income, credit and equity to support a new mortgage or deed of trust. If your current income cannot pay your present mortgage, it may be difficult to convince another lender to offer you a loan with a reasonable interest rate. Based upon the tightening of qualifying criteria for loan applications, refinancing in today’s market is becoming less and less of a viable option. It goes without saying that the only reason to refinance is to lower your monthly payment.

6. Short-Refi – This is the latest trend for lenders in working with delinquent borrowers to avoid foreclosure. The lender agrees to refinance the home with a reduction in the principal balance. Sometimes the lender will also reduce the interest rate as well on the new loan. The borrower needs to provide proof of a “hardship” and fully document the ability to pay the new mortgage.

7. Short Sale- If the sale proceeds are less than the total amount owed to the lender, the lender(s) may agree to a short payoff or “short sale” and write off the portion of homeowner’s mortgage that exceeds the net proceeds from the sale.

8. Deed-in-lieu of Foreclosure – If the homeowner agrees to voluntarily transfer title of the property to the lender in exchange for cancellation of their mortgage debt, the lender may agree to a deed-in-lieu of foreclosure. In most cases though, the homeowner must attempt to sell the home for its fair market value first (at least 90 days before a lender will consider this option).  This option might not be available if there are other liens on the home, such as judgments, second mortgages or tax liens.

9. Bankruptcy – A bankruptcy may allow the homeowner to discharge some debt and reorganize others to keep the property. However, if a homeowner doesn’t or can’t make the house payment after the bankruptcy, the home is foreclosed on anyway. It is not recommend for real estate agents to list the property and try to negotiate a short sale while the homeowner is going through this process. Homeowners need to seek legal counsel if they want to pursue this option.

Contact me if you have any questions, or need a referral to a trusted professional such as a loan modification specialist or bankruptcy attorney.