Monday, July 20, 2015

If you are facing foreclosure

This is NOT an all-inclusive list, but something to give you ideas on your options.  This is also NOT legal advice.  Please consult an attorney licensed in your state [or your country], to discuss your options.

First, contact your lender immediately upon realizing you won't be able to stay current on your loan. The earlier you act, the more options you have.

If you want to try to keep your home:

The most important thing to remember is that keeping your home means you must have some way to pay for it.

Reinstatement – you pay off your arrearage, generally by borrowing money from relatives, selling off other assets, etc.

Forbearance – You skip several payments, usually 3-6 months, and then you pay an increased amount after that, to make up the missed payments. This is generally good for a short-term problem, like a brief period of unemployment or illness, or a short military deployment, but you are back to work within a short period of time. Generally negotiated in advance of the missed payments.

Repayment plan – Similar to a forbearance, but you are already behind in your payments when you approach your lender.

Refinance – You can obtain a new loan with a new lender, paying off the current loan, with more favorable terms such as a lower interest rate and/or lower monthly payment because of interest-only, adjustable rate, or other options. This option is generally available if you have good credit, are employed, and you have equity in your home.

Loan modification – Your current lender restructures your loan. This is similar to a refinance, but you are working with your current lender, not finding a new lender. Your lender will have requirements you need to meet, to qualify for a modification.

Bankruptcy – There are differences between chapter 7 and chapter 13, the two most-common consumer bankruptcy actions. Best to speak with an attorney to decide which chapter might be the most helpful for you to meet your goals. You can strip [remove] a second trust-deed, pay off your loan arrearages over 3-5 years, reduce or eliminate other debt so you have more available funds to pay your mortgage, and take other actions to restructure your debt.

File a lawsuit – For non-judicial foreclosure states. This generally works ONLY if you file the lawsuit BEFORE the property is sold, record a lis pendens, and then request and obtain a Temporary Restraining Order, prohibiting the sale while you work out options to get yourself current. It does NOT work if you are wanting to reduce the amount you owe. Nor does it generally work if you file the lawsuit AFTER the property is sold, especially if it is purchased by someone who is NOT the lender.

Rent your home – If you payment is lower than the rental value, you can rent your home to tenants and use the rent to pay your mortgage. Or, you can rent rooms. To successfully take advantage of his option, you must research the requirements in your state and city for landlords, and make sure you meet the requirements and can maintain the home in habitable condition [or can afford to hire a property management firm]. I put this option last, because being a landlord is difficult and not something to consider lightly.

If you want to walk away from your home:

If you are significantly underwater [owe much more than the home is currently worth] or if you are unemployed or underemployed without much hope of obtaining employment at a level which will allow you to keep your home, you may decide to walk away from it.

Sell –If you have at least as much equity in your home as the amount outstanding on your loan, you can simply sell the property.

Foreclosure – Some states have judicial foreclosures, which means the lender sues you in court to obtain a judgment allowing it to foreclose [sell] your home. Other states have non-judicial foreclosures [including my state of California]. The lender can foreclose [sell] your home without going to court, so long as it follows the rules.

Short-sale – Your lender works with you to allow you to sell your home to a buyer at the current market price, which is less than the amount you owe on your loan. For example, if you owe $300,000 on your loan, but the home is only worth $250,000, you can sell it for $250,000, leaving a $50,000 deficiency. If you qualify, the lender may then “forgive” the deficiency, meaning you won't owe that amount to the lender. Check with your tax adviser to determine whether you must claim the forgiven amount as income on your tax return.

Deed-in-Lieu – You sign a deed giving your home to the lender, thus avoiding foreclosure. You must have your lender's permission to do this, if you want your loan forgiven. Otherwise, you still owe the money but you no longer own the home.

Websites with more information [US residents]

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