This outlines the most "popular options" an owner will consider, when in default on their loans. Also remember that some of these may not be available to every seller depending on their individual circumstances and/or existing lender.
Forbearance is an agreement between the lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time. If a borrower is behind in his or her payment, (because of a lapse of employment, and now has income coming in again) the lender may allow the borrower to pay the money back through installment payments over six months. The lender may decide, on the other hand, to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining arrears in one lump sum. The forbearance may be an oral agreement or written contract between the lender and the borrower. Generally these agreements will not exceed more than 12 months.
2. Loan Modification:
A loan modification is a change in any of the terms of the original note. This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender's discretion to assist the borrower through a temporary set back. Generally a lender will consider a loan modification when foreclosure is eminent and the borrower's income has been decreased or unable to make the mortgage payments, but will be able to keep the loan current after the loan modification.
3. Mortgage Refinancing:
Mortgage refinancing is an option where the existing lender (or a new lender) would allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a debilitating financial situation.
Refinances are generally open to borrowers that face a temporary set back in their financial situation, have shown outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.
4. Second Mortgage, Line of Credit:
The existing lender (or a new lender) may offer a second loan or junior lien (often called a "hard money loan") to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Hard Money loan fees are typically 5-10 times the average loan fees for an "A Credit" borrower. Plus interest rates often rival credit cards.
Use caution before you choose a "Hard Money Loan", as if you cannot make payments on your current loan(s), how can you on a new more costly loan?
5. Sale of the Home:
If the owner has been unable to work with the existing lenders, or find new lenders to complete a loan transaction in a TIMELY MANNER, it is time to get serious about selling. The sooner the owner starts preparing their home for sale (and listing it for sale with a Realtor) the better the chances are that the owner will get a fair market offer to purchase their home.
However, most owners will wait for "their pending new/refinance loans" and by the time they find out they cannot get financing; there is not enough time to "conventionally" sell the house with a Realtor.
The longer they wait, the more likely they will need to sell their house to an investor who offers "a quick closing, all cash transaction", and will pay less than fair market value for the property. In addition, typically the owner does not have the money to repair the home and get top market value, and will have to "discount" their sales price for any deferred repairs.
Selling the home to an investor quickly, in "as is" condition allows the owner to salvage his or her credit, pay off the loans, and retain any remaining equity in the home.
In certain cases, the lender may allow the borrower to sell the home when the proceeds from the sale are not sufficient to pay off the existing loan. This is known as a short sale. A borrower should check with his or her lender to discuss this option. Furthermore, the borrower may have to pay taxes on any loss the lender writes off from the short sale. A borrower should consult his or her tax professional before agreeing to a short sale.
6. Deed-in-Lieu of Foreclosure (DIL):
A Deed-in-lieu of foreclosure is a voluntary conveyance of title to the lender. Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure. In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage.
In order to qualify for a DIL, most lenders state that there must NOT be a second mortgage or junior liens on the property. Properties with values in excess of the amount owed against the home (to include normal closing costs) should consider selling the property before voluntarily conveying the home to the lender.
7. Bankruptcy Filing:
Bankruptcy is a way for people who owe more money than they can pay right now, ("debtors"), to either work out a plan to repay the money over time in a chapter 11, chapter 12, or chapter 13 cases, or wipe out ("discharge") most of their bills in a chapter 7 case. While either the debtor is working out a plan or the trustee is gathering the available assets to sell, the Bankruptcy Code provides that creditors must stop all collection efforts against the debtor. When the bankruptcy petition is stamped "Relief Ordered" upon filing, you are immediately protected from your creditors.
What chapter you choose to file under, what bills can be eliminated, how long payments can be stretched out, and what possessions you can keep, and the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure control other details. These are federal laws, which mean they apply all over the United States. The Code and Rules are found in Title 11 of the United States Code.
Think carefully before you choose Bankruptcy, as it will have serious financial implications to your life for the next 10 years!
The bankruptcy petition, schedules and plan are public documents and are available to the general public for viewing. Credit reporting agencies regularly collect information from the petitions filed and report the information on their credit reporting services. Bankruptcies normally will remain on your credit report for up to ten (10) years and will be taken into consideration by any person reviewing a credit report for the purpose of extending credit in the future. The decision whether to grant you credit in the future is strictly up to the creditor and varies from creditor to creditor depending on the type of credit requested. There is no law, which prevents anyone from extending credit to you immediately after the filing of a neither bankruptcy nor are creditors required to extend you credit.
The best way for you to obtain credit in the future is to generate an adequate and regular income and pay all of your financial obligations in a timely and responsible manner. Many creditors will not deal with you in the future unless you have already established credit with someone else and demonstrate that you are a reliable debtor. In general it is recommended that, after the filing of a bankruptcy, one learn to live within his/her income and not request credit, which is not absolutely necessary.
Many owners, who file bankruptcy and then later realize that they cannot keep their home and must sell it, find it impossible to find a place to rent. Oftentimes after a bankruptcy filing and a foreclosure, getting a landlord to accept you, as a tenant, is an almost impossible task.
Call us today and we will gladly discuss any of the above options with you.