This post is going to give you the basics to the second-most commonly asked question by people facing foreclosure – what are my options?
What you will see below is a general list. Not all of these options may apply to your particular situation. It’s possible that none of these situations apply to your personal situation. You’ll probably have at least one or two of these available to you, though.
1. Pay off your mortgage in full. I know it sounds crazy, because if you have the $350,000 in cash to pay off your mortgage, you probably wouldn’t be facing foreclosure. Like I said above, not all of these options may apply to your particular situation. There are some people though, real estate investors, business owners, and the like, who do have this kind of cash laying around. They leverage that money to earn better returns than just holding it. If you are one of those people, and you’re facing foreclosure, it’s better to pay the mortgage off and get your debt servicing under control on this property and take a mortgage out on another, better producing property.
2. Reinstate your mortgage. This is probably how most mortgage foreclosures get resolved. You miss a payment, maybe two. The bank calls you; maybe they send you a letter. You tighten your belt and stop spending your money on nonsense. The next month, you make up the missed payments before this case gets referred to a foreclosure attorney to commence an action.
3. Get a loan modification. At any time during the process (lenders may vary on this; some may stop accepting applications after judgment of foreclosure has been entered), you may submit a loan modification application. If the lender deems you qualified based on your income, the indebtedness, the estimated value of the property, and other debt ratios calculated by the lender, the lender may offer you a loan modification. The loan modification modifies the terms of the original note and mortgage. The term, interest rate, and monthly payment may change. The lender may add a balloon payment on the end of your loan. While most people facing foreclosure are seeking out this option, it may not be the most beneficial. A little bit on that here, and more on that in another post.
4. Do a short sale. If you owe more money on your mortgage than the property is worth, you’ll need the bank’s permission to sell the property. The bank will agree to accept less than what it is owed under the note and mortgage, and you don’t have to face a foreclosure. The bank will do this because it saves them money on legal fees, which typically can’t be recouped from the borrower. Once the bank pays all this money in legal fees, plus all of the money they’re paying for your taxes and insurance while you’re not making mortgage payments for several years, they would rather take the hit now than to go out of pocket for several years only to be able to resell the property for what was being offered 4 years earlier. By the way, beware of short sale “specialists.” They are very likely sharks that are trying to steal your property. You’ll need to list the property with a reputable real estate broker in your area before a bank will allow a short sale.
5. Do a deed-in-lieu. The deed-in-lieu of foreclosure happens where a person just wants to be rid of the mortgage and is willing to leave voluntarily. The bank will expect clear title, so you will not qualify for this option if you have a second mortgage or any judgments that you can’t immediately satisfy. Your property should be underwater if you want to give a deed-in-lieu, and banks usually won’t accept a deed-in-lieu until your property has been listed for sale with a reputable real estate broker in your area for at least 90 days.
6. Refinance your mortgage. This is a version of paying off your mortgage in full. You’re basically taking out a loan to pay off your loan in default. This is the kind of things that led to the real estate bubble and the massive foreclosures that happened in 2008. Once property values dropped, people were no longer able to refinance their loans, and all of those loans went into foreclosure.
7. File bankruptcy. Within the bankruptcy, you can try to get a loan modification. Some might say that it’s a more effective way of obtaining a modification. Depending on which chapter of bankruptcy you file and whether you’re getting into a bankruptcy plan, your mortgage debt will be discharged. This doesn’t mean that you’ll avoid foreclosure – the bank can still exercise its remedy in the property, but they can’t seek any money from you.
8. Sell your house. This is another version of paying off your mortgage in full. If you have equity in your property, you can sell your house, pay off the mortgage with the sale proceeds, and pocket the rest. This is a good idea if you can remain businesslike and unemotional about your house. It's a setback, but it's a setback you can quickly recover from. More on this here.
9. Fight. This is also a popular choice among people facing foreclosure. You are fully entitled to have the bank prove its case for foreclosure against you. There are a lot of technicalities that can lead to the dismissal of a foreclosure action, and you might be able to get your case dismissed. Caution about fighting is that the bank’s attorneys’ fees are recoverable against the borrower, so in addition to paying your attorney to fight, you’re indirectly paying the bank’s attorneys as well. If you have equity in your property, the bank’s attorneys’ fees are coming out of your equity.
10. Do nothing. This is also a tremendously popular choice among people facing foreclosure. For reasons stated more fully here, this is almost always a bad choice. You need to do something about your foreclosure problem. Ignoring it isn’t making it go away.
Jason Sackoor is a real estate attorney in Queens, New York concentrating on foreclosure and real estate litigation. You can check out his website, e-mail him, or call his office at (718) 767-3333 to set up a consultation.