Exploring Alternatives to Foreclosure
You have many alternatives to foreclosure. Here are a few of them, along with their benefits and drawbacks:
Mortgage Modification
Benefit: Reduces the payment a homeowner is required to
make on a monthly basis and may reduce the principal balance of the loan.
Drawback: Requires that a homeowner qualify for the new payment and will often require full documentation.
Rent the Property
Benefit: Allows homeowner to keep property indefinitely.
Drawback: The issues that can arise with a rental property are many, and rent often may not cover the full cost of property ownership and maintenance.
Deed in Lieu of Foreclosure
Benefit: Many times in a successful deed in lieu, the lender will forego their right to a deficiency judgment.
Drawback: Requires that a homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.
Bankruptcy
Benefit: Does not require lender approval.
Drawback: If a homeowner cannot afford their mortgage payment, a bankruptcy will only stall—not stop—the foreclosure process. There is also a cost to file bankruptcy as well, oftentimes in the thousands of dollars.
Refinance
Benefit: In some cases, this will lower payments.
Drawback: In today’s market, refinancing will almost always raise mortgage payments and is an expensive process.
Servicemembers Civil Relief Act
Benefit: If qualified, this will lower payments on all consumer debt in addition to mortgage payments.
Drawback: Must be active military to qualify.
Sell the Property
Benefit: Allows homeowner to avoid foreclosure and harvest some of their equity.
Drawback: In some cases, homeowners do not have sufficient equity to sell their property without negotiating a short sale.
Short Sale
Benefit: Allows the homeowner to avoid foreclosure and salvage some of their credit rating. This also keeps foreclosure off the individual’s public record, and in many cases will allow the homeowner to avoid a deficiency judgment. Borrower may qualify for another mortgage in as little as 24 months (as opposed to five years for a foreclosure).
Drawback: Short sales can be a trying process in which a homeowner is best served by contracting with a qualified real estate agent to guide the way.
Challenges of Foreclosure
FORECLOSURE:
Credit:
200-300 point drop, on record 7-10 years
Employment:
Foreclosure on credit record
Security Clearance:
On credit record, will affect in most cases
Deficiency Judgment:
No ability to negotiate non-deficiency
Ability to Buy Home in Future:
3-5 years under certain conditions