Avoid Foreclosure – Here are Options of Homeowners
There are a ton of homeowners right now struggling to make payments and hoping to avoid foreclosure because let’s face, things just aren’t the same as they were before the market took a dive.
People are working harder and longer for about half or a third of what they use to make. Retirement accounts look about as good as they did when you first started dumping into it. Any savings has been depleted.
And now to make things worse, even if you wanted to sell your home, most homeowners wouldn’t be able to because their home is not worth what they paid for it. Yes, nearly 25% of all homeowners are underwater or upside down, meaning they owe more than what their home is worth.
So even if they wanted to avoid foreclosure, many would agree that trying to list the home for sale would not even be an option. In fact, a lot of people in this situation are just giving up, throwing in the towel and “strategically” defaulting on their home because they don’t see any reason for keeping it.
3 Options To Avoid Foreclosure
So what are some options for homeowners who might be in this situation, to try and avoid foreclosure?
For those that might be upside down, struggling to make payments, trying to refinance is pretty much impossible. However, you could try to do a loan modification. This is where you work out a deal with the lender to lower your interest rate for a given amount of time in order to get back on your feet.
Each bank may have certain requirements and or expectations…
When the loan was originated, is it a primary residence, can you prove hardship, etc.
Another option is a short sale. A short sale is basically when an agent or investor negotiates a discount with the bank so they can sell the home to an end buyer which avoids foreclosure. The only downside to this is that you have to leave your residence and your credit is affected for the next few years.
Again with a short sale, you have to prove that you have a hardship, send in financial statements and wait about 8 months. But in the meantime, you basically live there rent free.
This is better than foreclosure, however there is also another option that could even be better ONLY if you have a 2nd mortgage. You might know it as principal reduction or note settlement. This is where you go to the bank and offer to “buy” the note for a discounted price. Similar to a short sale in that both are negotiating discounts, however this option allows the homeowner to stay in the home!
We love this option because not only does the homeowner stay in the home and avoid foreclosure, it doesn’t effect the homeowners credit either. It’s also a permanent solution and not just a temporary fix. And once a settlement is agreed upon, because it’s a lesser amount, payments are a lot less and now the home is no longer upside down.
Here is an example of a note settlement…
- John owes $300,000 on his home that’s worth $250,000
His first is $220,000 and his second is $80,000. The payment on his 2nd mortgage is $500. He negotiates with the bank to take $20,000 for the 2nd to be settled or wiped out. They agree. (yes this is very common, we have an high success rate so don’t think they won’t settle. It happens all the time.)
So now, you either pay them $20,000 to wipe out the note (eliminate $500 a month) or if you don’t have the money, a “note investor” like us, would buy the note and make new terms to you. We become the bank now. We would do this because now your home has equity. We might agree to $250 / month for the next 10 years.
That just lowered your payment by $250 each month and now you can sell your property if you need to get out without damaging your credit. You wouldn’t be able to walk away with much money but you would avoid foreclosure… Oh, and you don’t have to be delinquent either for this to work. That’s also why we love this strategy.
Now if you don’t have a 2nd mortgage, it’s very difficult to get a principal reduction on a first mortgage, however it has happened. Your best bet is to do a short sale and see if you can modify the loan. As with all these strategies, they like to see some sort of hardship, that is the key.