1. REINSTATE THE LOAN
The best way to avoid foreclosure is to pay what you owe. This may be harder than it sounds, especially if you are in financial trouble. However, for some people, it may be worth liquidating some personal property or taking out a personal loan from family or friends to buy some more time before entering the Notice of Default (NOD) Period (90 days). If this is absolutely not an option, then you might consider Option #2…
2. MODIFY THE LOAN TERMS
Banks are increasingly willing to modify loans for customers whose finances are in disarray and who may be facing foreclosure. The most common modification is switching from a predatory subprime loan (with an interest rate that can increase unexpectedly, balloon payments and negative amortization) to a more traditional thirty-year fixed loan. These loans have low interest rates, predictable payments, and no surprises. Talk to a lawyer in your area for representation.
3. REFINANCE THE LOAN
Due to the financial crisis on Wall Street, many banks are no longer requiring stellar credit for financing. This is especially true for home loans; most banks require such high-quality borrowers that it is next to impossible for someone who has payment issues with their home loan already. However, bank programs change all the time and you may just get lucky. Talk to a loan officer in your area to see if you might qualify for financing.
Your bank may be willing to suspend your loan payments for a period of time, which would allow you to take some time away from working and focus on getting back on your feet. An alternative measure may also be to simply make less money for a few months while you are facing hardship. Contact your bank to deal directly with them before contacting an attorney to negotiate on your behalf.
5. PARTIAL CLAIM
A partial claim is similar to a forbearance, but the bank will actually add months’ worth of missed payments onto your loan as an additional loan on top of your mortgage. This increases your chances of acceptance and allows you time to get back on your feet, but the bank will make you pay double for it in the long run. At least you get to keep your house in Southern California. If forbearance isn’t an option and you don’t want to refinance, follow up with a partial claim offer from the bank and increase your chances of acceptance by sweetening the deal for them. It’s wise to have a loan officer or attorney review terms before signing any new loan documentation.
6. DEED IN LIEU OF FORECLOSURE
The next five options are not as appealing as the previous five, because most homeowners and families in default want to stay in their homes. If you decide to go this route, it will involve giving up your home and possibly salvaging your credit so that you can start over. A deed in lieu of foreclosure essentially prevents the bank from foreclosing on your home, which saves you and the bank the heartache of fighting it out, and it just makes sense. It’s possible for the same reason (see above), that a bank can summarily sell your house from under you if you stop paying: California is a “trust deed” state, which means that their only recourse on the loan is the house. You walk away, banks gets houses and that’s it!
7. SELL IT
If you are in a situation where your home’s equity exceeds the amount of your mortgage, you may be able to sell it at or slightly under market value and use the proceeds to start over. This protects your credit and preserves your assets. Talking to a real estate agent about selling your home will help you determine whether it’s likely to sell at a price that will allow you to achieve your goal.
8. SHORT SALE
Banks are willing to take up to a 40% loss on the principle of the mortgage if you can simply sell the property at any price. Banks have had to cut back on foreclosures because of the credit crunch, but they still prefer to do so over taking a loss on a short sale. You need a real estate agent who specializes in short sales who can get an offer to pitch to the bank. If the bank approves your short sale, you can walk away with no tax liability; however, if it does not approve your proposal, you will have to pay taxes on this difference. Talk to a real estate agent in your area about how these tax cuts can help make selling your home easier for you!
In California, if you live in the property as your primary residence, you may be eligible for a stay of execution on your home and may be able to have all of your debt payments restructured. As long as you keep up with your plan and your bankruptcy attorney, you will be able to stay in your home, have lower monthly bills and after seven years it goes off your credit report. Bankruptcy is no free lunch but can help those who are financially strapped as long as they follow through with their plans after filing for bankruptcy.
10. PAY THE LOAN OFF
One last option for some homeowners who want to get rid of their second mortgage debt is to negotiate with their bank to settle it at a reduced amount. For example, a homeowner with $120,000.00 in second loans on her home. The bank wrote off the debt in exchange for $25,000.00 – $10,000.00 up front and $15,000.00 spread out over 36 months at an interest-free rate. Because banks are so hard up for cash these days, this option may just work for some who still have some savings but it looks like trouble is ahead for those who do not have much to begin with.
11. DO NOTHING
Many homeowners who default on their loans do the wrong thing: they hide. They stop answering the phone and the door. They don’t respond to bank letters. They allow their financial problems to get so out of hand that they are thrown out of their home. With all of these options available, there is absolutely NO excuse for you to become one of them. If you find yourself in this situation, act immediately by contacting a reputable lender or broker who can help you get back on your feet again!