What are Some Options to Foreclosure

First of all, it will depend whether the owner wants to keep the property.  If he or she does not wish to do so, the owner can sell the property before the mortgage forecloses.  The advantage to this is that he or she will not have a foreclosure judgment on his or her credit record.  This can help make it easier to secure financing in the future.  This option will more likely be available for borrowers who have equity in the property.  By selling the property, the borrower can then pay off the mortgage, and pocket the difference if there is equity remaining.   

Another available option is for the owner to file bankruptcy.  There are two primary types of personal bankruptcies available in the United States.  A Chapter 13 bankruptcy is used when the individual wishes to "reorganize" his or her debts and continue paying what is owed.  Filing a Chapter 13 bankruptcy can allow an owner to keep his or her real property.  This is not the case with a Chapter 7 bankruptcy, which completely discharges any debt the borrower had accumulated under the mortgage.  Of course, there are serious repercussions to filing bankruptcy, including severe damage to one's credit rating.  If you are considering this option, it is very important that you speak with an experienced professional to determine if this option is best for you.

A final option is to voluntarily deed the property to your lender using what is called a "deed in lieu of foreclosure”.  This transaction will appear on your credit rating, and may be difficult to negotiate with some lenders, depending on the laws in that state.  If you wish to pursue this option, it is usually best to have a lawyer or experienced credit counselors assist you on your behalf.

If the owner wishes to keep the property, there are a number of options available before the property goes into foreclosure.  The first and best option is to deal directly with the situation.  Oftentimes individuals faced with a difficult situation such as a potential foreclosure will simply ignore it and hope it will go away.  It is much better to be straightforward and explain any problems to the lender as soon as possible.  By doing this, the lender may be able to accommodate the situation, and work with the borrower to resolve the situation in a way that is agreeable to both parties.  Typically the borrower will deal with the lender's Loss Mitigation Department in cases like this.

There are a number of different options that the lender may offer depending on the situation.  To determine these options, it will usually be necessary for the borrower to provide detailed information about his or her economic situation.  The exact options available will depend on the policies of the lender.  There are, however, certain commonly available options, including forbearance, refinancing, mortgage modification, deferral of principal, and a temporary indulgence.

A temporary indulgence occurs when the lender agrees to suspend payments for a certain period of time, with the agreement that the suspended payments will be brought up to date when the temporary indulgence period is over.  Typically, the borrower will need to demonstrate that there is a temporary problem making it difficult to pay the mortgage, and that this problem will be resolved in the near future.  Two examples of this would be if the borrower had sold another property and was waiting to receive the proceeds from the sale, or if the borrower was waiting to receive an insurance settlement.

Another option is forbearance, where the lender agrees to allow the borrower to make reduced payments or no payments for a certain period of time.  Such an agreement can be difficult to negotiate unless the borrower has an excellent track record with the lender.  If the borrower does not abide by the terms of the forbearance, a foreclosure proceeding will likely be initiated.  A similar option is deferral of principal.  This means that the borrower agrees to pay the interest only for a certain period of time, and then making the normal monthly payments.   

Mortgage modification and refinancing are two other options available to a lender who finds himself or herself in a financial bind.  Mortgage modification means that the borrower renegotiates the terms of the mortgage with the current lender.  This can include changing the interest rate, adding any past due amounts to the principal, and extending the length of the mortgage.  Refinancing means that the borrower obtains a new mortgage with a different lender; this only makes sense if the borrower can get a lower rate than his current mortgage.

One last option is considering a home equity line of credit (HELOC).  If there is some equity in the home and the borrower is confident that this period of financial hardship will last for only a couple of months, the money from a HELOC can be used to help him or her through this difficult time.  However, keep in mind that with this option, the borrower will be attaining more debt; this would not be a good idea if the borrower does not have a plan in place for satisfying these additional monthly payments.

If you have any questions on the options listed above, please contact me at 415-412-9602 or fill out the form below and I’ll be happy to go over them with you.


To:  Kelvin Kam

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