Options When in Foreclosure
There are options you can take when facing foreclosure. There is no magic solution that should be used in every situation, so it is important to understand the different options.
Option 1 – Reinstatement
Reinstatement means that the loan is restored and put back in place. In order to accomplish this, the homeowner has to pay all monthly payments missed while in foreclosure in full plus all the late fees and legal fees.
Option 2 – Pay Off / Refinance
The loan can always be paid in full at any time up to the foreclosure sale. In some states, the homeowner can even reclaim the property several weeks after foreclosure. Refinancing is typically difficult since the homeowner's credit is damaged from the foreclosure process.
Option 3 – Deed in Lieu
This means that the homeowner gives the deed back to the bank. It is reported differently than a foreclosure and is less severe. In certain situations, the bank will even give the homeowner “cash for keys”
Option 4 – Credit Counseling
Credit counseling is typically for unsecured debt but in some instances, the reason the homeowner is in foreclosure is because of high credit card bills and/or medical bills.
Option 5 – Forbearance
Forbearance is an agreement between the bank and the homeowner to postpone the foreclosure as long as the homeowner takes certain actions. The amount owed is typically put on the back of the loan.
Option 6 – Partial Claims
Partial claims are only available to homeowners with an FHA loan and that meet the HUD (Department of Housing and Urban Development) guidelines. The homeowners are given an interest-free loan by HUD and it is paid off when the mortgage is paid off or the property is sold. The loan is reinstated when this option is chosen and this option can be combined with other options like forbearance and Chapter 13 bankruptcy.
Option 7 – Loan Modification
A loan modification is simply amending the mortgage. The bank typically extends the loan from 30 to 40 years. It is not a very good option for people that are extremely underwater unless the bank agrees to reduce the principal.
Option 8 – Chapter 13 & 11 Bankruptcy
Chapter 13 and Chapter 11 are reorganizations of debt. Chapter 13 is for individuals and Chapter 11 is for businesses. The most desirable part of Chapter 13 bankruptcy is that it will stop a foreclosure proceeding. The homeowner must have a viable income to make this option work.
Option 9 – Chapter 7 Bankruptcy
Chapter 7 is when the debts are discharged completely when a person is unable to make payments. The court will take non-exempt assets from a person to pay off as many debts as possible.
Option 10 – Short Sale
A short sale is when the bank agrees to take less than what is owed and the house is sold at a discounted amount. It is a great option for someone that wants to sell the house but cannot due to being “underwater” and owe more than what the house is worth.
Taking action and choosing an option early on in the foreclosure is the smartest move. This gives the homeowner time to explore all the options available to them and make the right choice.