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Last Options Before Foreclosure

Written by Ilyce Glink on January 7, 2013 in Real Estate  |   5 comments

Foreclosure is scary. Before the bubble burst and the housing crisis hit, it was taboo to go through foreclosure. Now it’s almost common. And, unfortunately, despite the rosier outlook for the real estate market, too many homeowners are still facing foreclosure. The most important thing…

last-options-before-foreclosureForeclosure is scary. Before the bubble burst and the housing crisis hit, it was taboo to go through foreclosure. Now it’s almost common. And, unfortunately, despite the rosier outlook for the real estate market, too many homeowners are still facing foreclosure.

The most important thing for any homeowner in this situation to know is that there are alternatives—foreclosure is not inevitable. If you act quickly and tackle your problems head-on, there may be a solution. You just have to accept the reality of where you are and what needs to be done to get you out of trouble.

“Once you put your head in the sand and pretend foreclosure is not going to happen, it will happen,” said Stan Cameron, housing development coordinator for the Foundation for Credit Counseling. “The most important thing you can do in a situation like this is to be proactive.”

According to Cameron, the question you need to ask yourself while facing foreclosure is whether, in the long-term, you can afford the monthly payments on your mortgage. Your monthly housing expense shouldn’t exceed more than 31 percent of your gross income, he said.

If the payments are too much or your income is too small or volatile, it’s time to consider some options to avoid foreclosure. Depending on your situation, you may want to pursue one or more of the following:

1. Ask for forbearance and make the payments later. If you are stuck in a temporary jam, you can try calling your lender and asking for forbearance, which means that the lender will give you a few more months to catch up on your payments.

2. Seek out a loan modification or refinance. This is a great option, especially if your home is not underwater. New government rules are also creating more opportunities for people with underwater mortgages to refinance, such as the HARP program.

3. Ask the lender for a short sale. Through a short sale, you find a homebuyer that will pay a price upon which your lender agrees. You can then sell your home for less than the amount you owe on the mortgage. Sometimes, however, you may have to pay part or all of the balance of the debt you still owe the lender after the sale. Remember that unless the Mortgage Debt Relief Forgiveness Act of 2007 is extended past its 2012 deadline, you may have to pay income taxes on any forgiven debt because the government considers it phantom income.

Click here for more information about short sales.

4. Give the lender your home through a Deed in Lieu of foreclosure (DIL). This option is actually very similar to a short sale. You hand over the deed to your home to the lender. In exchange, the lender cancels your debt and short sells the home. Lenders are leaning more towards short sales these days, so this may be a more rare find.

5. File bankruptcy. This is the worst of all your options, but bankruptcy does stop the foreclosure process as it stops all your lenders from collecting debt from you until you work out an agreement through the courts.

The last three options, including foreclosure, will damage your credit score, though to varying degrees. A short sale or a DIL will typically damage your credit much less than foreclosure or bankruptcy. You will also be able to borrow again more quickly with a short sale or DIL—it’s about two years for those options as compared to five years for foreclosure.

“Remember though that none of these options are a death sentence,” Cameron said. “The credit impact is not something that’s going to remain with you for life.”

If you are facing foreclosure and need help, seek out a free housing counselor from a non-profit organization like the National Foundation for Credit Counseling or the U.S. Department of Housing and Urban Development.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

5 comments

  1. Jeffrey L. Shurtliff says:

    Being foreclosed on illegally and filing three suits against the lender showing misconduct the courts let them go. This is wrong and I will never forget how I have been screwed by the system after working hard all of my life.

  2. Major E. Tucker says:

    I filed chapter 7 in 2010 it was finalized. I told the attorney I wanted to keep my home. This year I got a credit report, it states my home has been charged off through my chapter 7. What does that mean and is it to my advantage or the mortgage company. Thank you~

    • EFX Moderator, EM says:

      Major E. Tucker, Since you worked with your attorney for your bankruptcy, I’d recommend following up with them to figure out the details. They’d have the best idea of what accounts were impacted by the bankruptcy and how. Thanks and good luck.

  3. Anonymous says:

    A planned foreclosure is powerful. The banks have taken advantage of the little guys. BIG corporations use the system–why shouldn’t we. Bankruptcy is not the end of the world. You can wipe out 2nd mortgages, credit card debt and home mortgages AND start fresh. It can take up to 2 years and even longer to get out of the house. BUT you must put the mortgage $ away, and when you do lose the house, you will have a nice bank account. A potential landlord will be thrilled if you hand him/her a years worth of rent. Believe me, this is powerful and if you are in a position to file bankruptcy–DO IT!! Take advantage of the good old USA–The big boys do it all the time. Don’t be ashamed. Feel empowered!!!

  4. Tex says:

    Before telling people that a short sale “will typically damage your credit much less than a foreclosure”, you really should read these 2 articles from the FICO Banking Analytics Blog.

    They say, “There’s no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.”

    Research looks at how mortgage delinquencies affect scores
    http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html

    Are Short Sales Really That Bad?
    http://bankinganalyticsblog.fico.com/2012/08/are-short-sales-really-that-bad.html


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