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|Vol. III, No. 1,
Homeowners can leave a lot of money on the table when they lose their property to foreclosure. Sometimes it is unavoidable. But what is really sad is the homeowner letting the property go back to the lender because no effort was made to do something to fix the problem. As Uncle Ben says, “it ain’t easy,” but you should at least try because there are some good. . . .
What does our home mean to us? For most, it is the single biggest investment we will ever make. It is also the roof over our head, shelter for our families, and often our piece of the “American Dream.” When misfortune strikes, whether from illness, loss of a job, or too much other debt, a common reaction to the filing of a foreclosure lawsuit against a homeowner is for the homeowner to become paralyzed. If you take anything from reading this article it is this. When foreclosure comes you must take ACTION!
Losing your home to foreclosure has more impact than simply losing a place to live. It is preceded by a blackened credit report which only becomes darker if foreclosure is completed. Moreover, if the property is valued less than the amount owed the lender on the date of the foreclosure sale, the lender may be entitled to a deficiency judgment and seek repayment from your other assets. And finally, family and personal disharmony seem to be a natural consequence of such a stressful series of events.
What are your options? Here are some key Foreclosure Solutions.
1. Borrow Your Way Out Of Foreclosure. This is usually easier said then done. If you have friends or relatives that will support you in this time of need, you are lucky indeed. Other lenders are very leery of folks who are in foreclosure. Your credit is generally very bad and a new lender may be unwilling to take a risk on someone who has already defaulted on financial obligations with another lender.
There are lenders who specialize in “subprime” borrowers, but they will expect to receive a very high interest rate and fees in exchange for doing business with you.
There are also “hard money” lenders who are concerned only with the loan to value ratio associated with your property. That is, if the amount owed is low in relation to the value of the property, the creditworthiness of the borrower is ignored. The hard money lenders, however, are the most expensive lenders for folks with bad credit (or good for that matter).
Once you are in foreclosure, trying to get a loan to bail you out is usually a wasted effort at worst, and terribly expensive at best.
2. Forbearance / Loss Mitigation. Lenders will sometimes work with homeowners to allow them to catch up the back payments by adding the amounts owed to the back end of the mortgage. The conditions the lenders will require vary. The good thing to remember is that the lender does not want your house back. They want paid. If you can reassure them that you will not fall back into delinquency, they may give you a chance with a forbearance agreement. The earlier you contact the lender and try to work this out, the better. If at all possible, contact them before a foreclosure lawsuit has been filed.
3. Reinstatement. The lender generally does not have a contractual obligation to allow you to catch up your back payments if you have fallen behind even if you have the money. But again, they don’t want you home, they want paid. So it is very likely if you can raise the money to pay all the back payments, taxes, fees, attorneys’ fees, costs, etc., they will allow you to do so and then you will be current again.
4. Redemption. The means you can pay them off. Unless the final judgment of foreclosure sets a different date, the redemption date is the issuance of the certificate of sale. At any time before the issuance of the certificate of sale, you can pay the lender all it is owed and stop the foreclosure.
REINSTATEMENT & REDEMPTION ARE SOLUTIONS BEST EMPLOYED WITH THE HELP OF LEGAL COUNSEL.
5. Short Sales. This is a technique whereby the lender agrees to accept less than what is owned in exchange for it releasing the lien of its mortgage from the property and allowing the homeowner to sell it to a third party. This method is most commonly used when the property has little or no equity such as when the homeowner owes the lender or others as much or more than the property is worth.
There are many requirements involved to make a short sale happen. From the homeowner’s perspective, you cannot receive any funds from the sale of the property, you must show a bona fide hardship which caused the delinquency, and the property must be in a condition (i.e., poor and in need of significant repairs) that gives the lender an incentive to accept less than what it is owed.
Homeowners are cautioned about agreeing to sell their property to a buyer who wishes to employ a short sale. Try to negotiate at least two points: (1) the lender will take the property in full satisfaction of its claim and will not seek a deficiency judgment against you; and (2) the lender will not issue you a 1099 for income representing the amount of the debt forgiveness.
6. Bankruptcy. Even though bankruptcy has a long lasting negative impact on credit worthiness, it can nevertheless be a fine way of keeping your home and protecting equity you may have. The new bankruptcy laws have made this option more difficult. We can refer you to competent bankruptcy counsel if you are interested.
The best vehicle in this arena for a homeowner is Chapter 13. Chapter 13 is a financial reorganization for an individual. Of course, there are limitations and guidelines to follow, but for those who qualify to use this section of the bankruptcy code it provides many benefits. The key benefit is that it will stop a foreclosure. Then you are given an opportunity to begin making current mortgage payments and catch up on delinquent mortgage payments, attorneys’ fees and costs over time. You must have income to cover all your expenses associated with the plan and there are other requirements. But on balance, Chapter 13 can be an effective solution. On the other hand, keeping the house is not always desired. Sometime the overall debt load is too great or too many bad memories are associated with it. What then?
7. Sell The House. A house should be in its best condition if you expect it to sell quickly and for a good price. But how do you fix it up to sell it when you are behind with your mortgage payments? There is also a time consideration. Though foreclosure can take several months, a homeowner often finds it difficult to get everything done to prepare the house for sale, market it and close with a new buyer before the foreclosure sale. Then when the prospective buyer learns you are in foreclosure they may decide to wait you out and buy the property cheaper at the foreclosure sale or from the bank after the foreclosure sale.
But if you can fix and sell it on good terms this is the obvious choice. Otherwise, there are investors who specialize in buying foreclosure properties. These investors will offer to buy your house usually at a low price. Considering foreclosure may leave you nothing afterwards, a small return may be appealing. Often such an offer enables you to obtain another place to live, moving expenses, and more. Be careful to deal with someone with experience and integrity. There are traps for the unwary here.
8. Surplus Bids. Did you know that if you home sells for more at the court house steps than what is owed the foreclosing lender, you might be entitled to the excess, commonly called the “overage” or “surplus.” The rule is as follows: any surplus from a foreclosure sale must be paid to the next most junior lienholder(s) in priority and, if none or if they are all paid from the surplus, the remainder goes to the homeowner.
BE WARY OF INVESTORS OFFERING TO PAY YOU A SMALL SUM FOR YOUR QUITCLAIM DEED SHORTLY BEFORE OR AFTER THE FORECLOSURE SALE.
You should also know that an attorney can obtain a surplus for you without you having to pay a percentage of the surplus as a fee. (Note: Investors commonly offer to obtain a surplus for homeowners in exchange for 30, 40 and sometimes 50% of the surplus.).
WHATEVER YOU DECIDE, don’t wait until the sheriff is about to put you out on the sidewalk before you start trying to solve your problem. START NOW! The more time you have, the less pressure you will be under. You will make a better deal with a clear head and the hounds baying away in the distance rather than at your front door. TAKE ACTION!
The information provided herein is not to be considered legal or financial advice of the author. Readers should rely on their own legal or financial counsel regarding any matters described above. No warranties, express or implied, are provided. The foregoing may not be reproduced in whole or in part without the express written consent of the author.
© Jeffrey A. Icardi 2006