A personal financial crisis is alarming for anyone. It’s especially distressing for anyone holding onto monetary obligations, such as credit card debt, car payments, or a mortgage. Unfortunately, it’s hard to predict or even avoid many potential pitfalls in our times of economic upheaval. Anyone holding critical assets upon which their livelihoods depend doesn’t have time for guesswork. You need to plan for emergencies long before a crisis arrives. Many of us erroneously believe that failure to make a mortgage payment immediately results in foreclosure.
While a lender can take immediate steps after the first missed payment, that doesn’t mean you instantly lose your house. In fact, foreclosures can take several months. Ideally, you’d be aware of a potentially significant financial issue before any payments are late. The first step of your preparations should be to understand the alternatives to foreclosure. What are your options? Without first asking this question, you won’t be able to take the proper steps to avoid a foreclosure.
Learn About Refinancing
Refinancing has always been an option to help homeowners find better deals without having to move. A refinance is typically possible if a home holds value and equity. However, if foreclosure is already looming, many new lenders may not be so quick to agree to a loan. As such, this option is ideal if an individual reads the signs of financial trouble long before a missed payment occurs. In refinancing, basically, a new lender takes over the loan.
You can negotiate the new loan under new terms that work with the financial reality after the crisis—be it a loss of hours, wages, or similar. For a refinance to be effective, everyone must understand the new situation before the bank can draw up new terms. Otherwise, you may find yourself in the same situation of potentially losing a home, albeit to a different lender.
Explore Short Sale Options
One of the best and most straightforward alternatives to a foreclosure is a short sale. As the name suggests, it’s when a homeowner sells their home to a buyer for less than what they owe on the mortgage. The lender, as a result, comes up short of the difference, but the property passes to a homeowner who can make the new payments. The benefits of a short sale vs. a foreclosure are that it’s an accessible option that alleviates the burden of debt for those experiencing a financial crisis. However, as it’s a legal sale, much like the original mortgage arrangement, it often involves a lot of fine details.
The process usually involves the homeowner announcing their situation and proposing a short sale to the lender via a letter. The homeowner must then negotiate the stipulations, typically with the help of a real estate legal expert or professional short sale negotiator. As it is a sale, the process can take some time, and some states may also have rules regarding taxation of the money resulting from the short sale of a home.
Regardless, it’s a reliable way to take affirmative and documented action to circumvent a foreclosure and its negative repercussions. To qualify for a short sale, homeowners must be under reasonable and unavoidable duress. For instance, situations such as a natural disaster, slashed wages, job loss, and similar extreme events are valid qualifiers that make continuing to pay an agreed mortgage term suddenly no longer feasible.
Investigate Forbearance Opportunities
Another opportunity to avoid a foreclosure is to request a forbearance. Again, the type of loan you have and your current lender will ultimately determine your eligibility. A forbearance is an agreement with the lender to pay back any missed payments. Usually, the agreement accommodates the current financial issue and gives you room to recover.
Typically, the agreement will provide an alternative payment plan, either alongside current mortgage payments or after an agreed-upon period. Sometimes, a pause in payments altogether is negotiable, depending on the circumstances. Other common term options include adding a percentage of the missed payments to new payments or simply paying back the missed fees in a lump sum.
Consider a Loan Modification
Similar to refinancing, loan modifications shift the weight of financial responsibility to make it more manageable. As with short sales, different states process loan modification claims differently, and they may result in credit report repercussions. However, any reflection on credit or loan eligibility will be significantly less drastic than if a foreclosure occurs. The purpose of a loan modification is to negotiate with the lender for terms that reflect the individual’s current ability to pay.
For instance, a change in wages dramatic enough to put a home at risk makes renegotiation a sound choice; the ability to pay is still present, just not necessarily at the original amortization rate. A loan modification may result in either a reduction of interest payments, an extension on the payment time schedule, or a completely new loan from the lender. In some cases, a combination of two or three of these possibilities may result.
Offering a Deed in Lieu
Even when nothing else is possible, you still have alternatives to foreclosure. What are your options? In the end, you could offer up the deed. In most cases, a deed in lieu is the last action you want to take to avoid foreclosure. It results in few advantages to the homeowner, save avoiding the record and credit ramifications of foreclosure. As the name implies, you don’t bargain for or save your home in any way.
Instead, you hand the deed back over to the lender. In short, it’s a mutual realization that a dramatic enough change has occurred that you can no longer make the necessary payments to keep up with a home. As with any major financial transaction, this action will still affect your credit. Lastly, this action comes with the agreement by the lender to lift your debts. As with foreclosure, you’ll need to vacate the home, though on much friendlier terms than with a foreclosure, making it a good choice when all else fails.