Alternatives to Foreclosure
After you have missed 3 or more payments, the bank will eventually send you a “Notice of Default” (NOD). From that point on, you will have 90 days until they file a “Notice of Trustee Sale” (NOT), which sets the date for the actual Foreclosure Auction (Trustee Sale).
Once the NOT is filed, the property will be offered for cash bids at the Trustee Sale in 21 days. If your loan balances on the property are higher than the property’s value, there will be no interested bidders. In that case, the bank will become the “official” owner of the property, which will be now called “Real Estate Owned” (REO).
That is the foreclosure process in a nutshell. As you can see, time is of the essence when it comes to making a decision about your situation. Whatever action you decide to take, do it quickly, so you’ll have enough time to exercise what ever option you choose.
Here are main choices available when facing Foreclosure
Doing Nothing – By doing nothing, you will most likely lose the property at the foreclosure auction. This will negatively affect your credit (foreclosure usually stays on your record for 7-10 years) and will impact your ability to buy or even rent. This is the least favorable option.
Deed in Lieu of Foreclosure – Give the property back to the bank instead of the bank foreclosing. Banks generally require the home be well maintained, all mortgage payment and taxes must be current. Most loan applications ask if this has ever happened. Some people have reported that the “Deed in Lieu” will have as much negative impact on credit as Foreclosure.
Forbearance – A special mortgage forbearance agreement is a written repayment agreement between a lender and a mortgagor that contains a plan to reinstate a foreclosure loan that is a minimum of three payments past due and unpaid. If you qualify for a Special Mortgage Forbearance agreement, you may be allowed to postpone monthly mortgage payments for a period of time.
Reinstatement – This will involve convincing the bank of your ability to continue making payments in the future. You will need to pay the entire default amount plus interest, attorney fees, late fees, taxes, missed payments and other fees.
Partial Claim – A loan from the lender for a 2nd loan to include back payments, costs and fees.
Loan Modification – Utilizing the existing mortgage company to modify or extend the terms of the loan. This may allow the homeowner to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problem that caused the late payment.
Payoff/Sale/Refinance – There must be equity in the property to do this. This option involves paying off the entire loan amount plus any default amount and fees. Usually this is accomplished through a conventional sale or a refinance. In the case of a refinance, the new loan will likely be at a much higher interest rate and there may be other unfavorable terms.
Short Sale – A transaction that is a “short pay” or a “short sale” (also known as “pre-foreclosure sale”) simply means that the property is sold for less than the seller owes. A Short Sale will need to be negotiated with your bank(s), to convince them to accept less than what is owed on the property, and to have them issue a document releasing the lien and reporting the account as settled or paid.