There are 15 options when facing foreclosure. Some of the options are not very effective and some options are preferred in particular situations. Some options can even work together. There is no magic solution that should be used in every situation so it is important to understand the different options and which options works best case by case.
Option 1 – Do Nothing
This is the simplest and most basic option. Many homeowners will fall into this category out of default. The homeowner will loose their home and their credit will be ruined. No work is required but it will follow the homeowner for years to come.
Option 2 – Reinstatement
Reinstatement means that the loan is restored and put back in place. In order to accomplish this, the homeowner has to pay all monthly payments missed while in foreclosure in full plus all the late fees and legal fees. This option can be implemented very close to the foreclosure sale. It is extremely expensive but is a great option if the homeowner has the money somewhere to do so.
Option 3 – Pay Off / Refinance
The loan can always be paid in full at any time up the foreclosure sale. In some states, the homeowner can even reclaim the property several weeks after foreclosure. Refinancing is typically difficult since the homeowners credit is damaged from the foreclosure process.
Option 4 – Deed in Lieu / Walk Away
This means that the homeowner gives the deed back to the bank. It is reported differently than a foreclosure and is less severe. In certain situations the bank will even give the homeowner “cash for keys”
Option 5 – Credit Counseling
Credit counseling is typically for unsecured debt but in some instances, the reason the homeowner is in foreclosure is because of high credit card bills and/or medical bills. Unfortunately, there is more than an 80% failure rate.
Option 6 – Forbearance
Forbearance is an agreement between the bank and the homeowner to postpone the foreclosure as long as the homeowner takes certain actions. The amount owed is typically put in the arrears of the loan. Attorneys will typically draft a “Letter of Forbearance” for very little money or for free since they know that it is typically not a very good option and they will get more business from a bankruptcy filing.
Option 7 – Partial Claims
Partial claims are only available to homeowners with an FHA loan and that meet the HUD (Department of Housing and Urban Development) guidelines. The homeowners are given an interest free loan by HUD and it is paid off when the mortgage is paid off or the property is sold. The loan is reinstated when this option is chosen and this option can be combined with other options like forbearance and Chapter 13 bankruptcy.
Option 8 – Loan Modification
A loan modification is simply amending the mortgage. The bank typically extends the loan from 30 to 40 years. It is not a very good option for people that are extremely underwater unless the bank agrees to reduce the principal. It is a good idea to use a professional that is successful at getting the principal reduced that charges very minimal fees. Most homeowners cannot get their principal reduced if they try it on their own. Be warned though, loan modifications have an 85% failure rate according to the Federal Housing and Urban Development (HUD) office.
Option 9 – Negotiated Settlement
Lenders will negotiate a settlement of the debt. They will take a percentage of what is owed to retire the debt. The lender simply does a cost/benefit analysis to see if it makes sense to settle. It is a lump sum or nothing so it is only a good option for people that have access to large amounts of capital. Using a professional negotiator is the best bet to get the biggest discount.
Option 10 – Chapter 13 & 11 Bankruptcy
Chapter 13 and Chapter 11 are reorganizations of debt. Chapter 13 is for individuals and Chapter 11 is for businesses. The most desirable part of Chapter 13 bankruptcy is that it will stop a foreclosure proceeding. The homeowner must have a viable income to make this option work. It does affect the homeowner’s credit severely but some feel it is an acceptable risk.
Option 11 – Chapter 7 Bankruptcy
Chapter 7 is when the debts are discharged completely when a person is unable to make payments. The court will take non-exempt assets from a person to pay off as many debts as possible.
Option 12 – Sue the Bank
The banks were extremely sloppy before the mortgage crisis and practically giving out loans to anyone with a pulse. Many times banks were being abusive and even committing fraud. By suing the bank, it delays the foreclosure and compels the bank to modify, settle, or forbear. This option can be extremely expensive if a homeowner uses an attorney that doesn’t do this type of work consistently or an attorney that charges a very large retainer.
Option 13 – Sue the Bank with Investors
Since suing the bank is expensive, working with investors is a good option to bring the cost down. Making sure that the investors are reputable and that they do not charge any upfront fees or retainers. The best partner is one that will earn money from the profit that results from suing the lender for abuse and fraud.
Option 14 – Shortsale
A shortsale is when the bank agrees to take less than what is owed and the house is sold at the discounted amount. It is a great option for someone that wants to sell the house but cannot due to being “underwater” and owing more than what the house is worth.
Option 15 – Shortsale with Investor
Working a shortsale with an investor is a great option because the investor will put an offer in right away and start the shortsale process. Investors are also good because they typically work with a power team of professional negotiators, lawyers, and Realtors. Stay away from any investors that charge any fees whatsoever. The reputable investors only get paid upon a successful shortsale and is never paid by the homeowner. They should either get paid by the bank or the new buyer. In many cases, investors will also make sure the homeowner is taking advantage of programs like HAFA where the homeowner will receive money from the bank at closing. The best part of working with an investor is that they will help the client get back on track to improve their credit and purchase a new home if they choose. Some clients are even able to purchase a new home one year later after a shortsale! Read Shortsale Better Than Loan Modification to read more.
In Conclusion
Taking action and choosing an option early on in the foreclosure is the smartest move. This gives the homeowner time to explore all the options available to them and make the right choice.