Borrowers who are unable to obtain a loan modification or refinancing have other options which can either stop or avoid the foreclosure process. While some of these options may involve giving up their home, borrowers may find that getting out of a mortgage they can no longer able to afford, with minimum damage to their credit, is a sensible option. There are two main reasons for a borrower to avoid foreclosure, even if it means they cannot keep their home. The first reason is that it may allow them to find less expensive housing. This may help them pay down, or pay off, other debt that may have been accumulating while they focused on making mortgage payments and put them on a sounder financial footing overall. This can help them repair their credit and put them in a better position to become homeowners again down the road, or simply put them on a sounder financial footing. The lower the amount of debt, and the larger the down payment the borrower has available for the next home, the better of a financial position they will be in all-around. Borrowers with higher credit scores and larger down payments also get the best mortgage rates when they go to buy homes. The second, and perhaps the biggest, reason is that foreclosure has a very negative impact on a borrower’s credit rating for a long time. A borrower may have difficulty buying a car or making other purchases on credit for a long time, and will pay higher interest rates when they do. They may find they have to wait years before they can finance another home, even if they are able to compile a stellar credit history and a sizable down payment after they recover from their hardship.

Options short of foreclosure

What is a short sale?

A short sale is where the borrower sells the property for less than the mortgage liens that are on it. If the borrower is able to find a buyer for the property, the sale will have to be approved by either the lender, or their authorized agent. Although the short sale process can be a longer one than a traditional sale, the lender would often rather have a short sale, taking less than the amount the borrower owes, than have to put the property into foreclosure. Foreclosures are expensive to implement for the lender. Plus, once the lender takes over the property, they will be responsible for paying taxes, insurance and any utilities while the property is being sold. Credit impacts of a short sale include being unable to buy a property using conventional financing for up to two years.

Deed in Lieu of Foreclosure

A Deed in Lieu of Foreclosure means that the borrower agrees to turn ownership of the property back to the lender, and the lender agrees to forego the foreclosure proceedings. A Deed in Lieu of Foreclosure generally allows a borrower to get out of a mortgage faster and with less damage to their credit than going through the full foreclosure process. They may be able to negotiate other terms with the lender as well.

Stay of Foreclosure

This is where the foreclosure proceedings are temporarily halted, usually by a legal order. There are several instances where a stay might be enacted. The first is bankruptcy. Under a Chapter 7 bankruptcy, which is a liquidation of assets, the foreclosure will proceed. Under a Chapter 13 bankruptcy that includes the property, a repayment plan is put into place, and the borrower will be given a time frame within which all debt, including the mortgage must become current. This action will stop a foreclosure sale. A Stay of Foreclosure is also available to military people who are coming off of active duty and face financial hardships. The Soldiers' and Sailors' Civil Relief Act of 1940 gives such veterans a 90 day Stay of Foreclosure to give them time to address their financial situation. The Home and Economic Recovery Act of 2008 temporarily extended this 90 day stay to nine months, due to expire on January 1, 2011.

Mortgage Assumption

A mortgage assumption is where a borrower sells their home to a buyer who will take over, or “assume” the payments on the existing mortgage. This is more specific to FHA and Veteran’s Administration loans. Most, if not all conventional loans, meaning those that were taken out under Fannie Mae or Freddie Mac guidelines have what is called a due-on-sale clause, which says that if the property is sold, the loan must be paid in full at that time.

What if I Have to Go Through Foreclosure?

When a borrower enters foreclosure, there are many options that are available to them. If the borrower is either unable to sell the property, or utilize any of the options that have been described above, the lender will ultimately take back the property. Depending on what state the property is in, the process may take anywhere from six months to one year to complete. Judicial foreclosure states are those where the court system is involved in the foreclosure process and are in the high end of this range. Foreclosures in these states typically take longer than in non-judicial foreclosure states, which are at the lower end of the range.

Published on October 25, 2006