Alternatives to Foreclosure
Written by: Kristy Welsh
Last Updated: August 14, 2017
A press release issued by RealtyTrac in January of 2017 stated there were 933,045 properties with foreclosure filings in 2016, which was down 14 percent from 2015 to a new 10-year low. Since its peak of 2.9 million properties with foreclosure filings in 2010, it seems there has been a slow downward trend. Counter to the national trend, 12 states posted an increase to overall foreclosure activity in 2016 compared to 2015, including Deleware (up 45 percent); Rhode Island (up 29 percent); Massachusetts (up 21 percent); Connecticut (up 21 percent); and Hawaii (up 20 percent). Foreclosure is financially and psychologically devastating to families and affects the stability of their lives but there are ways you can avoid going through a foreclosure.
Possible Reasons for Foreclosure
Many homeowners who cannot afford their house payments simply walk away because they don't realize that banks and mortgage companies may be willing to work with them in an effort to avoid foreclosure. Foreclosures are costly and time-consuming for financial institutions, and depending on the state in which you live, the process can take months. Besides valuable time, foreclosure costs a considerable amount of money, and lenders would much rather keep the lines of communication open and work with those who can't pay their house payments to find a mutually beneficial solution. They may not be aware of the alternatives, but there are some alternatives available for those who qualify.
Alternatives to Foreclosure
FORBEARANCE PLAN: Forbearance means you are allowed to delay or reduce mortgage payments on a temporary basis with the agreement that another option will be used at the end of that time to bring your account to current status. Most lenders have a forbearance program available, but you need to be diligent and immediately contact the lender to report a temporary loss, hardship and/or reduction in income and to request a forbearance agreement. Your lender, if in agreement, will then temporarily cease legal actions, or not proceed initially, whichever the case may be.
Lenders may agree to combine your forbearance with a reinstatement or a repayment plan if you can provide adequate assurance that you can raise the needed funds to bring your account current by a specified date. Be sure you are provided this agreement in writing. Forbearance programs are best for people who have experienced sudden unexpected income loss or debt, and simply need some extra time to readjust their spending and recover financially.
SHORT SALE: Those who can't afford to pay their house payments and know they can't afford to keep their home can request a short sale. A short sale is when a lender accepts a discount or shortage on a mortgage balance to avoid a possible foreclosure auction or bankruptcy. Depending on your particular situation, this could be one of the best alternatives to foreclosure. Mortgage companies and banks that offer a short sale as a option are sometimes willing to take less than the amount owed on the home.
Depending on circumstances, lenders are often willing to completely forgive the homeowner of the debt. In many cases, the homeowner and lender have certain provisions that must be adhered to when transacting a short sale. For instance, many lenders require the home to be on the market for a minimum of 90 days, have established maximum commission levels for any real estate agents involved, and may require the broker be a member of the Multiple Listing Service (MLS). A hardship letter explaining the reasons for financial problems as well as a list of debts and income are required, as well as any other bank-specific paperwork and forms. If you can't pay your house payments and can prove financial hardship, a short sale could be one of the most viable alternatives to your financial problems.
DEED IN LIEU OF FORECLOSURE: As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but may increase your chances of qualifying for a mortgage loan in the future. A deed in lieu of foreclosure may be a viable option for individuals who can verify they are incapable of paying their mortgage payments due to financial hardship. This option may save lenders the time and expense caused by homeowners who abandon their homes, and it can be one of the best long-term solutions for all concerned.
Before most lenders will offer a deed in lieu of foreclosure, a typical requirement is that the house must be listed for sale at fair market value. The homeowner needs to demonstrate that they are trying to find a solution, therefore lending credibility to the homeowner through the action of actively trying to sell the home. If the market is stagnant and the home doesn't sell, and you qualify for a deed in lieu of foreclosure, the lender may allow you to sign off on the house and walk away without owing on the mortgage.
The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principle advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms that he or she would in a formal foreclosure.
The alternatives above are the three most common situations utilized to avoid foreclosure. Contingent on the type of mortgage loan you have, there may be others. Specifically: if you have a Federal Housing Insured (FHA) loan, you will want to contact HUD/FHA for guidance. The Department of Housing and Urban Development (HUD) has been instrumental in establishing guidelines to assist homeowners experiencing financial hardships. The goal is to offer financial alternatives to foreclosure, while allowing lenders to make determinations based on certain risk criteria.
Additionally, here is a link to a website which provides guidance applicable to homeowners with FHA Insured loans.
How Will These Alternatives Affect My Credit?
We went right to the myfico.com "Credit Education Center" to ask that question. Here is the answer verbatim:
"The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score."
If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.