Know Your Options to Prevent Foreclosure

Some homeowners know they can't afford their properties anymore, but aren't yet behind in their mortgage payments. Usually, lenders are less willing to work with a homeowners in a hardship situation until they have fallen behind and are moving towards foreclosure. This post is meant to help homeowners who are just about to start missing payments learn what options they have available if they can not afford the house any longer.

They might have a few options to make life a little easier. But because they aren't behind yet, they lender might not be as willing to work with them at this point. Once they start missing payments, the bank may be easier to work out a solution with. They don't really know that you're facing a hardship until they homeowners can't pay them.

If they can't afford the payments on your current mortgage, and their credit isn't great, then it might not make much sense to consider a foreclosure refinance.

If there is equity in the house, and they want to keep it, they could try selling to a private investor who would allow them to live in the property and pay rent until they can afford to re-purchase the house back. But this probably wouldn't work unless there was equity, as it is the equity which protects the investor's collateral (the house).

A friend or family member with good credit could potentially buy the house from the homeowners, and let them keep living there, as well. The good credit is important to get a lower interest rate with more manageable payments.

If neither of those are possible, then they could try selling. The homeowners in foreclosure can sell the house for less than it is worth, if the bank agrees to a "short sale." This would mean that the bank takes a lower amount than what they are owed, and forgives the rest of the debt. The homeowners wouldn't be responsible for paying the difference back to them, since the bank would agree to take less.

A short sale would let the homeowners sell the house for whatever reasonable price they can get for it. The bank would have to agree to the amount, but they will consider low offers if the house is not worth as much as what the clients owe them on the loan.

If the bank is really tough, and doesn't approve a short sale, then there are two ways to "walk away" from the house, as last resorts.

The first is a deed in lieu of foreclosure. This means the homeowners would voluntarily give the property back to the lender and they accept the deed in lieu as payment in full of the loan. This does not look as bad to credit bureaus as if it was a complete foreclosure, but a deed in lieu will look bad on a credit report. The bank will not mention the deed in lieu to the homeowners first -- the homeowners have to ask them about it. This is because a deed in lieu has to be given voluntarily, so they can't look like they pressured the homeowners into it.

The second way to "walk away" is just to find somewhere else to live and move out, leaving the property to go through foreclosure. The bank will proceed with suing the homeowners for the amount of the mortgage and will sell the property at sheriff sale to pay off the loan. If the property sells at sheriff sale for less that what is owed, they may be able to sue the former owners for the difference, which would then appear as a judgment on their credit. However, banks only do this very rarely, since they know that most people in foreclosure simply can't afford their homes anymore and getting a judgment won't really help them get their money back. Just walking away from the home is usually not a good idea, since there are so many other options available to stop foreclosure.

As far as suggestions, it depends on whether there is equity in the property and if the homeowners can afford to live there even with lower payments. If they want to hold onto the house, then selling to a private investor or friend/family would be an option. But if they can't afford it, then selling and using a short sale would be the next best bet, in most instances. And if all else fails, ask the bank to accept a deed in lieu of foreclosure. Those are the most common options and the order that homeowners follow them in when they are attempting to save their homes from foreclosure.

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