Avoiding a Mortgage Foreclosure
A borrower in a foreclosure situation should not simply walk away from the property. There are several possible resolutions. First, the lender might agree to modify the loan. Often, the first notices a lender sends to you when you are in default include information about possible modification or repayment arrangements. This is one of the reasons why you need to open mail from your lender. In the past, it was difficult to get lenders to make many concessions with borrowers who got behind on their mortgages, but now lenders are more willing to bargain because the real estate markets in many locations are so poor that the lender might recover very little for the property or have to hold onto it for a long time, which costs the lender money for taxes, upkeep, and insurance.
Also, if your default is due to a sudden increase in payments, you may be able to get a new mortgage under a federal program called FHA Secure. If your situation was temporary, you can reinstate some types of mortgages by catching up on the payments. Even if you cannot save the property by one of these methods, borrowers with government-insured loans (FHA, VA, and USDA) often have additional rights to modify or reinstate their mortgages. These borrowers should contact a housing counselor certified by the relevant agency for advice.
Seeking Advice
Many Legal Aid programs offer representation or advice to people in foreclosure. It’s worth calling the local Legal Aid office, even if you don’t think you are eligible for their assistance. Even if they are unable to defend you, they may be able to refer you to a lawyer who will assist you for a reduced fee. While you are making phone calls, you can also do your own research to find a real estate lawyer who specializes in this area. Visit AttorneyPages.
Foreclosure Prevention Act of 2008
Some homeowners may be able to take advantage of the Foreclosure Prevention Act of 2008. To find out whether you might qualify for assistance go to Mortgage Foreclosure—What it is, When it Occurs, and How to Avoid it.
When You Can’t Save the Property
A short sale
Whether you can save the property or not, you still have choices. Sometimes the lender will agree to a short sale, which is a sale of the property for less than the mortgage amount, after which the lender forgives any loan balance that is not covered by the sale price. Lenders will agree to this arrangement because it saves them the cost of selling the property and maintaining it until it is sold. Borrowers benefit because they don’t have to fear a deficiency judgment. This typically will not work if the borrower has a second mortgage, but even then, it’s worth asking all of the lenders whether they will agree to a short sale.
A deed in lieu of foreclosure
Another possibility is a deed in lieu of foreclosure, in which the borrower signs over the deed to the lender. The lender saves the cost of foreclosing on the property; the borrower avoids a deficiency judgment.
What Happens to Your Credit Rating?
Sometimes borrowers wonder if a deed in lieu of foreclosure or a short sale will affect their credit score differently from a foreclosure. For most purposes, all methods will have similar effects on your credit. However, choosing an option other than foreclosure ends the process sooner. This may offer you an advantage later because your credit will get better with time, assuming the foreclosure is the last derogatory entry on your credit report.