Foreclosure is a dirty word. It brings sad images in our minds: Families being forced out of their homes, their furniture laid out in the street. A big notice stuck on the front door that says that the property was foreclosed on. It can be quite stressful for the property owners as well as the neighbors.
I have had experiences dealing with people undergoing financial difficulties. Many property owners don’t know the options they have when it comes to their properties. They allow the properties to go into foreclosure simply because nobody told them that they have options!
Unlike the misconception, foreclosure begins the moment you miss the first payment. If you have a property for which you’ve missed a mortgage payment, here are five ways in which you can avoid a costly foreclosure and still come out on top.
Sell your property
No matter what the condition of the property is, you can always sell it. I have written another article (hyperlink) that shows six ways to do this. As the property owner, you have the right to sell your property to anyone until it is sold at auction. It is unfortunate that many property owners think that once the foreclosure process has begun, they can’t do anything except allow the property to sell at the Auction on the courthouse steps. Selling your property before the auction will give you more money in your pocket, plus the benefit of avoiding a foreclosure on your credit report.
You can always contact your bank and tell them about your financial condition. Sometimes, they will be willing to extend your loan period and help you catch up with your missed payments. Always keep an open line of communication with your lender and keep him apprised of your progress on the property. The bank is there to help you, not hurt you (even though their letters are nasty!) Remember, if you keep talking to them, they may hold off on the foreclosure!
Bankruptcy (Be careful!)
This is a way I have seen bankruptcy attorneys recommend, and trust me, they DON’T have your best interest at heart. The attorneys will tell you, “You will get to live in the house without making any payments!”. This sounds like a lip-smacking proposition, especially after you’ve read the nasty letters the bank sent to you after a couple of missed payments. While it is true that the attorney can delay the foreclosure with legal tactics, he can’t avoid it forever. The banks will eventually file a motion to release the property from the bankruptcy proceedings and proceed with the foreclosure. Towards the end, you will still lose your home and have a bankruptcy + foreclosure on your credit report. This combination could prevent you from buying another property for up to 9 years!
Although Bankruptcy is an option available to you, I certainly don’t recommend it except in rare cases.
Catch up on missed payments
After you miss a few payments, the bank will call the ENTIRE loan due (instead of the missed payments). In legal jargon, this is called ‘Accelerating the note.’ This means that they will send you a letter stating that you have a certain number of days to pay the ENTIRE outstanding loan balance + interest + penalty, or else they will auction off your property to the highest bidder. This letter sends shivers down the homeowner’s spine because he couldn’t afford the monthly payment; how can he be expected to come up with the entire loan balance? It usually sets him along a downward spiral that ends up in him losing the home. Here’s an option you have: You can reinstate the loan by making the missed payments + interest + some fees and stave off the foreclosure! Yes, that’s right. It’s called the ‘right to reinstate’ the loan. It is funny how banks don’t tell you about this. You can look up your loan documents and look for this clause.
Although it’s not common these days, I’ve run into properties where the ‘As is’ value is less than the outstanding loan balance. Sometimes this also happens because the property needs a major Rehab. In such cases, a short sale is the best way forward. You will need a trusted ‘Short sale Expert’ to guide you through this process. The advantages are that the bank forgives the difference between the loan balance and the house value. You also get a chance to save your credit and avoid a foreclosure that would ruin your credit report for seven years. With a short sale, you can become a property owner within three years instead.
Each deal is unique. You should connect with a specialist to review which of these options is a good fit for you based on a combination of your financial situation + your property.
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