Foreclosure Alternatives

Foreclosure Answers and Help, Call Ron Today (click here)

The current U.S. housing market and national financial crisis has caused untold stress and heartache for many families across America.  Foreclosure is one of the most devastating financial challenges that a family can face, and one that many times can be avoided.  The foreclosure alternative options available to Arizona residents are many.  Following is a brief explanation to each of these solutions, including their benefits and drawbacks:

Reinstatement -
A reinstatement is the simplest solution to a foreclosure, however it's often the most difficult for families to do.  The homeowner simply contacts the lender and requests the total amount owed to the lender(s) to bring the account current, and pay that amount by the date identified by the lender.  This solution doesn't require the lender's approval and will reinstate a loan account up to the day before the final foreclosure sale.

• Benefit:  Doesn't require the lender's approval
• Drawback:  Requires that a homeowner be able to pay ALL missed payments, fines and fees at one time.

Forbearance or Repayment Plan -
A forbearance or repayment plan involves the homeowner negotiating with the lender to allow them to repay missed payments, fines and fees over a period of time.  The homeowner typically makes the current loan payment IN ADDITION TO a portion of the missed payments, fines and fees they owe.

• Benefit:  Allows the homeowner to repay missed payments, fines and fees over time.
• Drawback:  Requires that a homeowner be in a financial position to pay not only their current loan payment, but also a portion of the back payments owed.  Some lenders require the homeowner to 'qualify' for a repayment plan.  NOTE: Typically a home loan is not fully reinstated through a forbearance or repayment plan until all agreed payments are made in full.  If a homeowner misses just one payment they can end up in the same stage of the foreclosure process that they were in previously.

Sell the Property -
If a homeowner has equity in their property they can sell it and cure the foreclosure.  Unfortunately many sellers believe that they have to sell much faster than they actually do and end up taking the first offer that comes along.  A qualified Real Estate Professional will help the homeowner harvest as much of their hard earned equity as possible.

• Benefit:  Doesn't require the lender's approval
• Drawback:  Homeowners need to check their loan documents - it's possible there could be a prepayment penalty or lien on the property that could eliminate any equity.  Depending on the current market the loan amount may be higher than the current market value of the home.  Lender approval would be needed to sell the home for less than what is owed (see Short Sale below).

Rent the Property -
In some cases a homeowner facing foreclosure will have payments low enough to allow him to rent the property and keep current on his loan payments.

• Benefit:  The homeowner is generating rental income to make the loan payments each month.
• Drawback:  The homeowner can no longer reside in the property and must find another place to live.  Depending on the current rental market, the monthly rental fee a tenant is willing to pay may be lower than the loan payment(s), causing the homeowner to add money out-of-pocket to meet the monthly loan payment.  Also, the homeowner has the additional duties of being a landlord - which comes with legal rights and responsibilities.

Refinance -
If the homeowner has sufficient equity and income and their credit has not been too badly damaged they may be able to refinance.

• Benefit:  Foreclosure is avoided and the homeowner can remain in the home.
• Drawback:  The homeowner must have sufficient equity in the home.  Typically, monthly loan payments increase - especially if refinancing from an Adjustable Rate Mortgage (ARM) into a fixed rate loan.  There are also fees associated with the refinance.

Loan Modification -
In some cases where homeowners do have the means to afford their loan payments, their lender may qualify them for a loan modification.  A loan modification is very similar to a lower interest refinance where the lender lowers the interest rate on the existing loan in order to lower the payments.  The homeowner will need to qualify for a modification by sending in proof of income and expenses.  If this option is available it is an excellent option for homeowners to keep their properties.

• Benefit:  Homeowners can remain in their homes.  Loan rates are adjusted to a more affordable level.
• Drawback:  This option will most likely be available to a homeowner who is experiencing a hardship due to a loss of job or income or if they will not be able to afford the modified payment.

Deed-in-Lieu of Foreclosure -
A Deed-in-Lieu of Foreclosure is sometimes referred to as a friendly foreclosure since the homeowner essentially gives the deed back to the lender.  This may prevent the lender form having to go through a lengthy foreclosure process.  The lender agrees to take the deed back in exchange for the property and they typically have no further recourse.

• Benefit:  The homeowner no longer has to make monthly loan payments.
• Drawback:  May still have negative credit implications depending on the agreement between the lender and homeowner.  Will usually not be allowed if there are two lenders or if there are other liens on the property.  Not a good option if the homeowner has equity in the property.

Bankruptcy -
A bankruptcy may stop a foreclosure and allow a homeowner to reorganize his debt and keep his property.

• Benefit:  Homeowners can reorganize other debt and keep their home
• Drawback:  This may only stall the foreclosure.  If the homeowner is not able to make payments after bankruptcy the lender will foreclose.  Another major drawback to bankruptcy is that it makes it very difficult for the homeowner to sell his property once he enters the bankruptcy process.  It makes it nearly impossible to negotiate a short sale unless the bankruptcy trustee and other creditor agree to release the property from the proceedings and allow it to be sold.

Short Sale -
When a homeowner owes more on their home than it is currently worth, and one of the other solutions do not apply to their situation, the property can be sold for the current market value (Selling the property Short of what is owed to the lender(s).

• Benefit: Avoid the severe credit score damage that comes with foreclosure, Experience a quicker financial recovery and avoid the foreclosure entirely
• Drawback:  Depending on whether or not the home is a primary residence or investment property and how long the homeowner has occupied the property, there may be tax and deficiency judgment implications.  Homeowners will be advised to discuss these implications with their attorney and tax advisor.