Options to Consider When Foreclosure Looms

By Holden Lewis, bankrate.com | Published: 11/01/2007

Starting a dialogue with your lender is one way to dig yourself out of a financial hole.

Foreclosures are on the rise. The Center for Responsible Lending predicts that there will be 2.2 million foreclosures in the coming years. According to the New York Times, the Joint Economic Committee of Congress will soon issue a study predicting 2 million foreclosures by the end of 2008.

Whether an impending foreclosure can be blamed on job loss or an interest rate increase or something else, there are steps to take to reduce the severity of the problem.

That doesn't mean that the resolution will be painless. You might have to move, and your credit score will take a hit. But once you have fallen more than two or three months behind on mortgage payments, there aren't any easy options if you don't have enough cash to bring the loan current.

Here are six options for when foreclosure looms:

• Sell the property: If you can find a buyer before the house is auctioned, you can sell it and keep whatever equity still exists. This course of action is possible only when the house is worth more than you owe.
  
• Work out a deal: Your lender may be willing to work with you, rather than lose money at a foreclosure sale. This especially is true if you fell behind because of a temporary loss of income, and you can prove that you're able to catch up over the next 12 to 36 months. If you made all your payments on time until the rate on your adjustable-rate mortgage went up for the first time, the lender might offer to freeze your loan at the original rate. Lenders don't do this often, but the practice is becoming more common.
  
• File Chapter 7 bankruptcy: If you can't get caught up in time, you will not be able to keep the house -- but you'll generally be able to delay the foreclosure sale a month or even several months. Any remaining debt to the lender will be wiped out.
  
• File Chapter 13 bankruptcy: If you can afford to make the future mortgage payments and the delinquent payments, too, file Chapter 13 bankruptcy. This is different than Chapter 7, in which assets are liquidated but debts are wiped clean. With Chapter 13, you keep your assets and, under court supervision, you repay your debts under a three-to-five-year plan. Read more about recovering from bankruptcy.
  
• Short sale/deed in lieu of foreclosure: A short sale takes place when the bank allows you to sell your property for less than you owe. Be careful -- the bank may allow the sale to go through, but only on the condition that you repay the deficiency. In a deed in lieu of foreclosure, the property is signed over to the bank in exchange for the bank giving up its rights against you. Why might a bank agree to either of these? Lenders spend $30,000 or more to foreclose on a property. Most lenders will consider these options to avoid foreclosure costs.
  
• Walk away from the house: Otherwise known as "jingle mail" (because the owner mails the keys to lender) packing your things and moving out is a drastic action, and you'd be wise to speak with an attorney before doing it. Depending on where you live and what type of mortgage you have, the lender might have the option of suing you for any deficiency still owed after the sale.

Any sale or transfer of property has tax consequences, including a foreclosure sale or a deed in lieu of foreclosure. Seeing an accountant is probably a good idea, as well.

• Signing over your property title to another company: Some companies say that after the mortgage is current they will re-sign the property back over to you. This rarely happens. Instead, the company is likely to pull out equity, not make any mortgage payments and allow the property to be foreclosed. You can't prevent foreclosure because the property is no longer in your name.
  
• High-interest second mortgage: When a property has equity, there are companies that will give you a second mortgage, in an amount as high as 70 percent of the equity available. The interest rate could be as high as 18 percent and the fees can be exorbitant. They are hoping that you'll blow the money and default -- which allows them to take the property from you.

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More on FrontDoor:

• Foreclosure Guide
• First-Time Homebuyer's Guide
• Home Seller's Guide
• Tools and Calculators
• The Skinny on the Short Sale
• Recovering From Bankruptcy

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