Things to Consider as Alternatives to Foreclosure
The current state of the economy has forced many people to endure financial hardships that have not been seen in decades. The financial stress that has been imposed upon many families has led them to the brink of foreclosure and financial ruin. However, there are several alternatives to foreclosure that may be an option for some.
The Foreclosure Process
The foreclosure process is a situation in which a property that was used as collateral for a mortgage loan is repossessed by the lender and sold to recover the debt in the event that the property owner, i.e. the debtor, defaults on mortgage payments. If the borrower fails to meet the terms indicated in the mortgage agreement, the foreclosure process will begin.
Deed in Lieu of Foreclosure
In the event that you are facing foreclosure, you can attempt to avoid the process by negotiating for a Deed in Lieu of foreclosure. This essentially means that a homeowner relinquishes the property back to the lender and in exchange the lender would free the homeowner of all financial obligations to the mortgage. In simple terms, this is considered a “voluntary foreclosure” as the homeowner would be surrendering the property to the lender without the need for an expensive foreclosure proceeding.
There are advantages in opting for the Deed in Lieu of foreclosure: the lender gets to avoid the lengthy and costly foreclosure proceedings in court and the debtor avoids the embarrassment and notoriety associated with foreclosure. In addition, lenders can sometimes be convinced to lease the property to the homeowner.
A loan modification is another alternative to foreclosure that may actually allow the homeowner to stay in the home. The loan modification process consists of a lender agreeing to adjust the interest rate and/or the repayment period on a defaulted mortgage if the borrower shows the ability and willingness to sustain the new payments. If the financial situation of the borrower is not positive, the lender may permit some amendments to the initial mortgage contract. The main advantage of a loan modification from the perspective of the lender is that modification is cheaper than foreclosing a property. The benefit for the homeowner is that a loan modification can lower the monthly mortgage payments and help avoid a foreclosure.
Many people confuse loan modification with forbearance agreements. A forbearance is only a temporary relief given to borrowers who are facing financial hardships. It gives homeowners relief from mortgage repayments for a short specified period until they are able to get their finances back on track. After the forbearance period has ended, the homeowner will be required to resume the mortgage payments in accordance to the terms stipulated in the mortgage documents.
If a loan modification and deed in lieu of foreclosure are not viable options for homeowners, they may opt to sell the property through a short sale. A short sale takes place when the property is sold for a value lower than the mortgage balance. Short sales occur when the lender and the borrower decide that selling the house and recovering some money is preferable to the borrower defaulting on the loan. Short sales are beneficial to both the borrower and the lender. The borrower avoids damaging credit reputation while the lender avoids expensive foreclosure proceedings.
Overall, a foreclosure should be a last option for homeowners who find themselves in a financial bind. Homeowners facing foreclosure should speak with their lender or an experienced real estate professional in order to determine the best option for their particular situation.