Foreclosure is a procedure whereby a bank, or other secured creditor, takes back real property that had secured a loan. Usually, the procedure is prompted by the borrower defaulting on the promissory note.
- Live within your means and save for a rainy day. Most people facing foreclosure don't follow this advice and end up asking, "How did I get to this position?" There are many ways for homeowners to get themselves into this quandary. Many people stretch their finances too thin, so that the slightest downturn causes hardship. People get sick, some lose their jobs. Others take equity from their homes as quickly as it grows, and spend it just as fast. Some people buy a home they cannot really afford using a mortgage that, when it readjusts, they will not be able to pay.
- Pay your bills or sell your home. At the risk of sounding facetious, there are only two ways to avoid foreclosure. Keep making the payments, or simply sell the home and pay off the loan. Most foreclosures preclude that possibility because usually the loan balance exceeds the value of the property.
Nobody benefits from the foreclosure process, neither the lender nor the borrower. If your financial difficulty is of a temporary nature, take action as soon as you become aware of it. The bank may re-cast your loan; they may extend it from 30 to 40 years. They may add missed payments to principal. They will be willing to help as they most certainly do not want to take your house back, but they have to be made aware as soon as possible. Too many people react like deer in the headlights until it is too late.
- Is a short pay/sale for me? A short sale is where the lender accepts less than the full amount owed on the loan in order for you to sell said property. They sometimes allow this because, typically, a short sale will net the bank around 85%-90% of the sale proceeds, whereas a foreclosure might only net them 70%-75%. They will not grant this debt relief easily.
You must prove financial hardship. You will need to be behind at least 60 days before they will talk to you. Do not speak to the person at the call center on you monthly payment coupon. You must contact your lender's "loss mitigation" or "work out" department. Bear in mind, you will be required to "reverse qualify" to prove that you were initially qualified for the loan you took, but due to changed circumstances you no longer are.
Be aware, any fraudulent or misleading statements in your initial loan application will come back to haunt you. It is not a step to be taken lightly. You may also incur a tax liability from the debt forgiveness, so please consult with a tax professional before you take this step.
- Should I tough it out? If the only reason you are in foreclosure is that your house value has dipped below the owed amount, do not go through the process. The damage to your credit will be devastating. Ride out the storm. You will be better off in the long run. Historically, the fluctuation in house prices has been cyclical. Keep making your payments and you will be back in the black before you know it.