Few circumstances could be more gut-wrenching than losing a home to foreclosure but if you’re facing the foreclosure of your home, you do have options. You may be able to save your home, your credit and maybe even some cash if you act quickly enough when you find yourself unable to pay your mortgage.
This should ALWAYS be your first step. Your mortgage lender may be willing and able to work out a mutually agreeable deal since lenders often lose money in a foreclosure. Though the Making Homes Affordable program is dictating interest rates and payments for some troubled homeowners, many cannot meet the criteria and lenders are learning to be more flexible.
Sell the home
If you can manage to sell your home before it is auctioned, you’ll be able to keep any equity. Granted, many homeowners are underwater (the home is worth less than the mortgage balance), but there are some specific ways to make your home more appealing. Once you DO sell, make sure your housing choices reflect the new reality of your financial condition.
Short sale or deed in lieu of foreclosure
A “short sale” takes place when the bank allows you to sell your property even though the mortgage won’t be paid in full. The price you sell it for is “short” of the mortgage balance. But don’t think you’re getting away with anything – the bank will demand you repay the deficiency. Under a deed in lieu of foreclosure, the property is signed over to the bank in exchange for the bank giving up its rights against you. Why might a bank agree to either of these options? Lenders spend $30,000 or more to foreclose on a property. If it’s cheaper to allow a sale/deed in lieu of foreclosure, the bank will probably take that option.
Declare Chapter 13 Bankruptcy
Chapter 13 bankruptcy will allow you to keep your assets and make payments under court supervision over three to five years. You will have to present an income and spending plan to the court and it will have to be approved. Chapter 13 is different than full bankruptcy, in that you are able to make payments AND the delinquencies.
Declare Chapter 7 Bankruptcy
Chapter 7 is full bankruptcy. You will probably be able to delay eviction for a few weeks or months while the bankruptcy is processed, but you will most likely (95%) lose the home. Your debt will be wiped clean and your credit will be ruined for seven years.
Walk away from the home
Just pack up your belongings and leave. It isn’t a pretty option, but a lot of people are choosing it. If you do decide to walk away from your home, at least have the decency to let your lender know the house is empty. The only question remaining (other than where you’ll live) is whether your lender can sue you for any deficiency when they sell the home. That really depends on which state you live in and what type of mortgage you have. Please call a lawyer before you take this step.
There’s always the tax consequences
Anytime you receive a monetary benefit, there are tax consequences. Make certain you check with a tax lawyer and/or an accountant since forgiven loans or a sale/deed in lieu of foreclosure can be considered income by the Internal Revenue Service.
Photo by respres