Foreclosure Options: Short Sale, Mortgage Modification, or Just Walk Away

The adjustable rate mortgage sure sounded good a few years back; you got 100% financing at a very low interest rate; fixed for 3 years before it resets or adjusts according to the market. You probably had a plan to sell the home soon or refinance before the rates went up. You didn’t count on the values declining to the point where you owe more than the home is worth, making refinancing difficult to impossible. Your rate continues to adjust, the payment increases significantly, you cannot afford the payments and you are in danger of losing your home.

Following are stages of foreclosure and your options:

Miss one payment: Payments that are 30 days late are reported to credit bureaus to be reflected on your credit report and factored into your credit score.

Miss three payments: Typically, lenders file a notice of default at this time; some are very aggressive and some wait up to a year to file. Some hold off if you have contacted them and made satisfactory payment arrangements. Of course, more late payments are reflected on your credit report.

The notice of default is public record; soon you are receiving mail and phone calls from companies promising to save your home or reduce your payments. You are also an easy target for scam artists who promise to take over your mortgage while you pay them rent; they collect your rent, they don’t pay the mortgage and the foreclosure process continues as your credit suffers more damage.

90 days after the notice of default: Lenders typically give borrowers 90 days from the notice of default to make up their payments, late fees, legal fees and any other charges that have accrued. If the arrearage is not paid up, a notice of sale is sent out and the foreclosure sale takes place within the next 30 to 60 days. At this point, your credit report is quite bruised and your lender may or may not be willing to work with you.

Options: It is important to contact your lender and speak to someone in the loss mitigation department as soon as possible; the earlier in the process you are the more options you will have. Resolving issues early will help avoid serious damage to your credit report. You will be more likely to work something out with the lender before the foreclosure sale, also known as sheriff’s sale.

Look into Refinance Options: If you have equity in your home and your lender hasn’t yet filed a notice of default, you may be able to refinance with a more affordable mortgage. An experienced mortgage broker will be able to help you determine your best option. Do not get into another adjustable rate mortgage or interest only mortgage, leaving you vulnerable to repeating the process.

Workout or Modification: If you enter into a workout agreement with your lender it is important to be focused on a plan that works with your budget. You must be able to make the payments as agreed; if you fail to make the payments, the lender will accelerate the foreclosure process.

Short Sale: If you owe more than your home is worth, it is sometimes in the lender’s best interest to accept a short payoff on the mortgage balance. This saves having a non-performing property on the books that continues to lose value in today’s declining market. A short sale will have less damaging effect on your credit report as you are doing something to meet your obligation to the lender.

Deed in Lieu of Foreclosure: You can offer to sign your home over to your lender in exchange for being released from the mortgage obligation. This keeps you from having to pay off the mortgage and the lender avoids further legal costs to complete a foreclosure. The lender does not have to accept a deed in lieu of foreclosure; typically, he will require that you try to sell the home first.

Credit Counseling Services: Legitimate credit counseling services typically have housing counselors who can analyze your situation and help you evaluate your options.

Let Foreclosure Run its Course: You should save this for your last option after all other methods to avoid foreclosure have been exhausted. In some states and some cases, the lender can go after you for any deficit between what the house eventually sells for and what he is owed.

Foreclosure, though devastating and overwhelming, is not the end of the world. You can get through this difficult time, reorganize and rebuild your life and your credit score. You will be able to get another mortgage and with knowledge and experience gained from this situation, you will be less likely to go through this a second time.

This article was written by David Smith of U-Move-On, a company who helps people find the best solution to their foreclosure problem. U-Move-On assists in evaluating the individual situation and explains all one’s options. They provide the resources and services for help with the entire foreclosure process, credit restoration, finding another nice home, moving expenses, legal help and more. There is no complicated contract to sign and you do not quit claim interest in your home.