Unfortunately there is a lot of mis-information about what to do when you go into foreclosure. Most of the folks who contact you are primarily interested in selling their solution a new loan, selling your home, etc. Here is a brief summary of your real options, some things to watch out for and some legitimate sources of information. We hope it helps!
Your options once in foreclosure:
1. Find the money to bring your loan current. Easier said than done. But if your financial problems were just temporary, and you can make your payments going forward, it might be worth selling something, or working weekends to catch up.
2. Work it out with your lender. The number one mistake most people make when facing foreclosure is not talking to their lender. The idea that the lender wants your house is largely a myth. It is typically in their best interest to work things out with you, especially if your financial problems are temporary. Options they can offer include:
- Loan Modification: Typically they modify your loan to add the past due amount to the principal balance which spreads repayment over the entire loan term so that you only have a small payment increase.
- Forebearance Agreement: Allows you to repay the past due amount over a period of time. Your home typically stays in foreclosure during the forebearance so be very careful that NO payments are late during this time as the lender can foreclose on your house immediately if just one payment is late with NO further notice.
- Short Sale: If the value of your home has decreased, the lender may be willing to accept less than the full amount due upon sale of your home. Note that they will typically require proof that both: a) the house is worth less than you owe (after sales commission, taxes and other fees), and b) that you no longer have the financial ability to make the payment. Be sure to hire a Realtor with short sale experience to handle the sale.
- Deed-in-lieu of Foreclosure: The lender allows you to hand over the keys and walk away. This is very rare as the lender then becomes responsible for any additional debts you may have encumbered on the property. They typically prefer to complete the foreclosure which wipes out loans and liens that were incurred after theirs. Nonetheless, it never hurts to ask.
3. Get a New Loan - either refinance the existing loan, or obtain an additional loan. Even if your credit has taken a hit you may find that this is still possible, especially if you have equity. Just make sure that when you are done you can afford the new, likely higher, payments. There are a number of options when getting a new loan:
4. Sell. If your financial situation is anything other than really temporary this should be your first choice. It has been said that a man s home is his castle, but owning a home you can not afford often feels more like a jail, no matter how much you may think you love it and can not live without it. If you choose this option, just remember that it can take quite a bit of time to sell, especially if you want the best price, so it is best to start early. To sell you have a number of options:
- Hire a Realtor: You ll typically net the most money with this option. While the Realtor takes a commission from the sale, they can often get a higher sale price for the home. The key is to find a GOOD Realtor. Not your family member or friend who will list it cheap because he or she really needs the listing. Find a knowledgeable and experienced agent in your area. Also make sure to keep your lender in the loop and verify that you have enough time before the foreclosure auction. If there isn t enough equity left in the home to price it correctly then make sure the Realtor is experienced with negotiating a short sale with the bank (see above).
- For
Sale By Owner (FSBO): You save the commission but do all the work. You pay for advertising, you take all the phone calls, schedule appointments for showings, allow Buyers into your home that you are unable to screen (most professional Realtors will screen or prequalify ALL Buyers prior to expending any resources and man hours to assure they are not just window shopping). You also risk incorrectly pricing your house which will either keep it from selling (priced to high), or net you less than you deserve (priced to low).
- Quick sale to an investor: You ll definitely get less money, but if time is running out and you just want to move on this can be a viable option. Be careful of "subject to" sales, and avoid lease option deals where you get a promise that you ll be able to buy the house back at a later date.
5. Declare Bankruptcy: The first thing to know about this option is that it does not truly stop foreclosure, it typically just delays it. The lender is considered a secured creditor by the bankruptcy system and that essentially gives them the right to either be paid in full or receive the security (in this case the home). If you remain unable to make the house payment you will ultimately lose it in foreclosure, and the bankruptcy will only delay the inevitable and worsen your credit. Note that a bankruptcy stays on your credit report for 10 years, a foreclosure only 7. If on the other hand you are struggling due to high credit card debt, judgements, wage attachments or other financial problems that can be restructured under bankruptcy, it might be just the ticket. The key here is to find a really good bankruptcy attorney that will give you honest advice, and not just take your money to file a bankruptcy that will hurt more than help.
Know all your options, find good, qualified people to help and you lll do just fine. A couple of gotcha s to watch out for:
1. Fraud. A lot of folks prey on homeowners in foreclosure. If something sounds to good to be true it usually is. Remember that fraud depends on trust. The folks that are the best at it always appear to be someone you can trust. So be careful, use common sense, and don t be afraid to talk to a lawyer, your lender, or a seasoned real estate professional about any offers you receive.
2. Deficiency Judgements. Depending on the state you live in, and the type of loan you have the lender might be able to get a deficiency judgement against you if they receive less than what you owe. So check your state laws, and do everything you can to maximize the homes sales price to minimize the possibility of a deficiency. Say you have a $100,000 loan and the house sells at foreclosure for $80,000 you could get a deficiency judgement for $20,000. It does not always happen but more and more lenders are exercising this option.
3. Taxes. Note that if the lender receives less than they are owed you may get a 1099 at the end of the year for the amount of debt that was forgiven . Say you have a $100,000 loan and the house sells at foreclosure for $80,000 you could owe taxes on $20,000 of income. If possible talk to a tax advisor or accountant to better understand the impact of this.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to excluse income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years from 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separtely). This exclusion does not apply if the discharge is due to services performed for the lender of any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.
It is important for you to know that the lender cannot pursue a deficiency judgment AND issue a 1099. They can only do one or the other, not both.
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