Foreclosure is the legal process lenders use to try to recover the loan amounts they are due on past due home loans. Most lenders in fact do not want to own real estate and would rather have the loan paid off, or the loan payments being currently paid. Most homeowners who have suffered a financial setback also would like to prevent foreclosure, keep their home, and get the loan payments current. This page is designed to help you the borrower sort out the options to avoid foreclosure and hopefully reinstate your home loan.
Fannie Mae, Freddie Mac, HUD, and the VA, all endorse programs designed to keep homeowners in their home if it is at all possible, or to minimize the credit and financial damage if it is not possible to avoid foreclosure. The process of determining whether a homeowner is likely to be able to recover from a financial setback is similar to the original loan underwriting (qualifying) process.
Personal and financial information along with supporting documentation is collected and forwarded to the existing lender who will review, then approve or decline a possible workout based on the borrower(s) income, assets and expenses. In many cases the homeowner can successfully complete this process on their own if they have the time to properly assemble and submit a complete loan workout documentation package for the lender to review.
The paragraphs below cover individual aspects that should be considered when trying to prevent foreclosure. Once the decision has been reached about keeping or selling the home, topics are listed in the order of which options are typically least expensive for the homeowner up to those which are more expensive/credit damaging. Links to various resources are below those topics.
Please remember that ultimately the only thing that will end foreclosure proceedings is repayment of the debt, everything else is delay of the proceedings.
KEEPING VS. SELLING YOUR HOME
If your monthly house payment (including property taxes and insurance) does not exceed 40% of your gross monthly income, it should be possible for you to keep the property. If the payment is greater than 40% of gross monthly income, consider selling the property to avoid negative impacts to your credit. The objectives in order of importance should be:
1. Keeping the property if possible.
2. Don't give away equity if you can keep it or liquidate and put it in your pocket.
3. Minimize damage to your credit, you will need it later.
LENDER WORKOUT
Before exploring new options always remember lenders want the loan to be current, not to have to complete a foreclosure. Ask yourself the following:
1. Have you tried to come to terms with your existing lender?
2. Can you make up the defaulted amount over a period of months?
3. Can you re-write the note and include the defaulted amount?
4. Can you give the lender a deed-in-lieu of foreclosure and preserve your credit?
These are questions you should ask yourself and possibly your lender if you haven't done so already. They will want to know why the loan is in default and why you think you will be able to make the payments in the future. Temporary financial setbacks that have since been cured are the best candidates for this. Your lender will probably be inclined to continue foreclosure proceedings if they have reason to believe they will have to start foreclosure proceedings again in 6 months.
REFINANCE OR NEW LOANS
Basic lending guidelines require all home loans total up to less than 70% of the current market value of the property. If you have more equity than that, you should have no difficulty in obtaining a new refinance or 2nd Trust Deed to bring your loan current. Expect higher interest rates and loan fees.
LOANS TO GET YOU CURRENT
If you experienced a temporary financial setback that has since been cured and are going to be able to keep the property, first consider family and friends for a loan to get current. It's much cheaper than hard money loans, but MAKE SURE you will be able to pay them back. You do not want to put them in the position of having to foreclose to get their money back. Hard money loans are typically private investors who will lend money based on equity in the property. Credit and income are not issues of importance and loan approval is usually a matter of days with funding following shortly. Loan amounts will usually be enough to bring existing loans current, pay the financing costs and put some money in your pocket. Loans will be amortized over 30 years to keep the payments lower and the balance will be due in 2 to 5 years.
BANKRUPTCY
This is a major step that will have lasting impact on credit reports. Seek appropriate legal advice. If the Notice of Default has just been filed on your home, you have sufficient time to explore the options for new loans or selling the property. If the public auction is going to be held very shortly, Chapter 13 bankruptcy is a very common way to delay the sale. When you file bankruptcy, your financial matters fall under the jurisdiction of the courts which could limit your options. SEEK LEGAL ADVICE.
ASSISTANCE LINKS
FORECLOSURE RESOURCES FOR CONSUMERS
From the Federal Reserve Board
HOMEOWNERSHIP PRESERVATION FOUNDATION
Free counseling and planning for foreclosure prevention
FREDDIE MAC AVOIDING FRAUD VIDEO
A short video on avoiding mortgage fraud
HOW TO AVOID FORECLOSURE
Advice from HUD
DEPARTMENT OF VETERANS AFFAIRS
Advice when you have trouble making payments
