Life is full of ups and downs. Sometimes the job market is great, and other times we are left scrambling to make ends meet. For many homeowners, a downturn can mean coming face to face with pre-foreclosure and even foreclosure.
The good news for the distressed homeowner is that there are options. Before we can discuss which options are viable for you, you will first need to determine precisely how much you owe on the property and if any assistance is available from either the government or the mortgage provider.
Contact Your Lender
The best time to call your lender is before you start missing payments. This puts you in a much better position, and the mortgage provider may be able to offer you payment deferral or other assistance. At the very least, you will be able to establish precisely how much you owe and when you have to pay it. Collecting the facts is the first step towards resolution.
Are you already in Pre-Foreclosure?
The term pre-foreclosure frightens many folks, but it does not mean your home is being taken away or sold out from under you. At least not yet. Pre-foreclosure means that you are behind on your mortgage payments and have received, or should have received, a Notice of Default for lack of payment. During pre-foreclosure, the lender will initiate the legal proceedings to repossess the property eventually. As long as you can pay what is owed during the pre-foreclosure period, then all legal proceedings cease, and you never have to face foreclosure.
Even if you are unable to afford the back payments, there are many ways to avoid foreclosure. And, believe me, you want to avert foreclosure if at all possible. I’ll explain why before we delve into the various options available to you.
What a Foreclosure means for the Homeowner
Without taking evasive action, a house in pre-foreclosure will inevitably end in foreclosure. Here is what that means.
- A court ruling gives the lender full ownership of the property.
- The occupants of the property will be forcibly evicted from the premises.
- The lender will sell the property, generally at auction, and keep all proceeds of the sale.
Unfortunately, the consequences do not end there.
- The foreclosure will go on your permanent record.
- You will be unable to qualify for a loan even years after.
- Your credit score will plummet.
- You will be ineligible for relocation assistance.
- The foreclosure will turn up on rental and employment background checks.
For these reasons, not to mention the stress and psychological trauma, foreclosure and the house sale at auction are a very last resort. Thankfully, there are ways to avoid it.
Option A: Find the Funds and Make the Payments
This is, by far, the best outcome. It certainly won’t be easy, but there are ways to raise the money necessary to stave off foreclosure. Doing so will enable you to retain ownership and residency of your property while protecting your credit and generating equity.
Here are a few methods to consider (the more you can apply, the better):
- Delve into your budget and cut out any non-essentials.
- Consider getting a second job or renting out any unused bedrooms for supplementary income.
- Investigate a loan modification to lower your monthly payments.
- Some lenders will offer forbearance, meaning you won’t have to make mortgage payments (or at least not all of it) for an agreed-upon time. This can provide the time needed to get back on your feet and save up money to make the back payments.
These options are great for those going through a temporary rough patch and need some time to catch back up. If, however, you see no chance of alleviating your financial difficulty in the near future, other options may serve you better.
Option B: Equity in Your House? Sell Quickly
Why quickly? Because, depending on what stage of the foreclosure process you are in, you may not have much time before the lender takes ownership of the property, and you are left with nothing.
This option works best if you have equity in your house, meaning your mortgage is less than the property is worth. Selling your house under these circumstances will enable you to pay off the mortgage (thereby avoiding foreclosure), save your credit score, keep a foreclosure off your record, and let you keep any money left over from the sale to start fresh.
Here are your two best options to sell and walk away with cash in your pocket:
- Hire a Real Estate Agent. Although you may net a little more this way, a traditional sale typically takes months. This time factor makes it risky since that is time you may not have. Not to mention the house’s risk falling out of escrow, the expenses involved while the house is on the market (taxes, insurance, utilities, etc.), or the money that is so often needed for required repairs during a traditional sale, money you may not have.
- Sell quickly to an investor for cash. By using a trusted network of investors, such as offered by SolidOffers, you can have a cash offer on your house within 24 hours. A cash buy also means a fast close (usually within 7-14 days, so the bank won’t have a chance to foreclose). You won’t have to pay any real estate commissions, you can pick your moving day, and a cash buyer will often cover all the closing costs. You may not net as much this way, but you will be able to walk away with money in your pocket (instead of in the lender’s) while avoiding the long-term consequence of a foreclosure.
If you are pressed for time, selling your house quickly to a cash buyer is often your best route in avoiding foreclosure. Not everyone has equity in their property, though. So, what to do if you owe more on the mortgage than your house is currently worth?
Option C: Money out of Pocket
Of course, you could sell your house for less than the mortgage amount and then make up the difference yourself. This, of course, only works if you have the funds to do so. Even then, it is a reluctant option. Nobody wants to pay the bank out of pocket and receiving nothing from the sale of their house, but the consequences are far less severe than a foreclosure. For some, it may be their only option.
Option D: Short Sale
If you are upside down on your mortgage, you may want to consider a short sale. A short sale allows you to sell your house for less than you owe on it and, usually, walk away without debt. But there’s a catch.
Since your lender will receive less than the mortgage balance, they first have to agree to a short sale. Not all lenders will, and those that do will have the final say on any offers. Your credit score may still dip, but not nearly as much as with a foreclosure. There are some other drawbacks too.
Since the lender is involved in the selling process, the escrow period can take months or years once a buyer is found. And there are no guarantees with a short sale. If the best offer is well below the mortgage balance, the lender may refuse the sale or try to hold you responsible for the difference (depending on the laws in your area).
A foreclosure is never easy, but fast action can save you time, money, and grief. Your best option is to make up your payments.
Your second-best option, if you have equity in your property, is a quick cash sale. Doing so will avert foreclosure while putting the remaining proceeds in your pocket instead of the lenders. And that, we can all agree, is where your money belongs.