People who are having trouble making their house payments and are facing foreclosure often are often not aware of their options. Anyone in this situation should be counseled in the foreclosure process and five alternatives to foreclosure. These alternatives are: Refinance, Loan Modification, Bankruptcy, Deed In Lieu of Foreclosure and Short Sale. Until you understand each of these options and how they might affect you, you cannot make an informed decision.
Refinance/Loan Modification
For individuals who want to keep their homes, a Refinance or a Loan Modification is a good alternative. There is a streamlined refinance process which has been discussed on Real Estate 411 that allows you to refinance even if you owe more on your mortgage than your house is worth. A Loan Modification, which will allow you to reduce your monthly payment, is another option. To apply for a Loan Modification, you need to contact your lender and provide financial documentation such as paystubs, bank statements, tax returns and a hardship letter explaining why you need your loan modified.
Bankruptcy
A Bankruptcy may be appropriate whether you intend to keep your house or whether you are giving it up to Foreclosure or Short Sale. A Chapter 7 Bankruptcy is a quick option that will allow you to discharge all of your debts in approximately 90 days. A Chapter 13 Bankruptcy is longer and you have to make monthly payments for 3 to 5 years. With a Chapter 13, however, you may be able to strip a second lien from your home by paying as little as 10% of the balance over time. So for many people this is a great option to reduce their debt load and payments and restore some equity in their home.
Deed in Lieu/Short Sale
For people who do not want to keep their homes, sometimes Bankruptcy is also an option, but also, A Deed In Lieu of Foreclosure and Short Sale are other options. A Deed In Lieu allows you to turn the property back to the bank in exchange for a release of further liability. A Short Sale allows you to sell the property to a third party for less than the balance. Usually the seller will attempt to negotiate a release of liability in a short sale, however, sometimes the seller may have to bring cash to closing or sign a promissory note to pay the difference off over time. Usually the negotiated amount is less than the full balance, but it all depends upon the circumstances of each individual case.
There are federal programs such a HAMP which controls Loan Modifications and HAFA which governs Short Sales and Deeds In Lieu. And there are also state programs such as the revisions to foreclosure statute which mandates that banks discuss Loan Modifications with a borrower before beginning Foreclosure and also MSHDA’S Hardest Hit Fund which is designed to give unemployed borrowers a break. Unless you or your representative understands each of these options, you can make a mistake that costs thousands of dollars. You must work with someone who is familiar with all of these programs.