Losing a home to foreclosure can be a devastating event, both financially and psychologically. Avoid foreclosure with these expert tips from Deborah McNaughton, credit expert and financial coach.
Cause and Prevention
LoveToKnow (LTK): What are the main reasons for trying to avoid foreclosure?
Deborah McNaughton (DM): Foreclosure is a very painful thing. A foreclosure is initiated when a homeowner stops making the house payments. Credit scores are affected severely as a result of a foreclosure. FICO scores can drop 100-150 points on a credit report. With a low credit score, most people are unable to qualify for new credit. It will take several years before your credit report is restored and you can purchase another home. By avoiding a foreclosure, people can have peace of mind, feel secure in their home and avoid a foreclosure notation on their credit report.
Options to Avoid Foreclosure
LTK: Is a short sale a good alternative to foreclosure?
DM: A short sale should always be your first choice if you are struggling to make your mortgage payments and you owe more than your home is worth.
The first thing you need to do is list your property with a real estate company. If you get a buyer there is paperwork you must complete such as a hardship letter and your financials. These papers are sent to the lender along with the offer to purchase your property at a price that is lower than your balance. This is not a quick process. It may take the lender weeks or months to decide if they are willing to accept the offer. This risk of waiting is that you may lose your buyer.
Here is a word of caution while waiting for the approval for your short sale: If you have not been making your mortgage payments the lender may foreclose on your property. Also keep in mind that the short sale department is separate from the foreclosure department. Make sure they both know what is going on with your situation. Just because they are the same lender, it doesn't mean they communicate.
LTK: Is a short refinance a good way to avoid foreclosure?
DM: A short refinance is similar to a short sale, but you keep your property. If your payments are not behind, contact your lender to see if you are eligible for a short refinance. You would then contact a new lender that will order an appraisal on the property. If the appraisal is less than the balance you owe, the new lender will tell you what the loan amount is that you will qualify for.
Once you get a commitment letter and appraisal from the lender, submit it to your current lender requesting a reduction of your current balance. If they agree to a reduced payoff, continue with the new lender and complete your new loan with a lower loan amount. With a lower loan amount your monthly payments should be lower than your previous loan.
LTK: What is a lease purchase option as it pertains to avoiding foreclosure?
DM: A lease purchase option allows a buyer to purchase your property for an agreed sales price and a date to complete the transaction which can be a year or longer. A deposit is made that is applied toward a down payment. Monthly payments are set up and a portion of the payment will apply toward the sale. With the payments you receive you will need to make the monthly payment to the lender of the property.
If there were past due payments on your current mortgage, make sure you get enough down payment money to catch them up and continue to make the mortgage payments until the sale is complete.
The lease purchase option will set the sales price for the future which is beneficial if the property is "underwater," meaning the balance is higher than the value. It allows the market to stabilize and start building equity in the property. It also avoids a foreclosure that will save your credit report.
LTK: Is renting the home out a good option for avoiding foreclosure?
DM: Sometimes a financial crisis may be a temporary thing. The payment on your mortgage may be higher than you can pay and you need to downsize to make lower payments.
Renting your house out may be an option for you. If you get a renter that can cover your payments you can rent another place for less money. When things get better and your finances loosen up you can always move back into your home.
LTK: Is it a good idea to liquidate assets in order to catch up on delinquent mortgage payments?
DM: If a person is living outside their means and can't budget I don't recommend using retirement funds or draining other accounts to avoid a foreclosure. If you do this and don't change your spending habits and set a budget, you will end up in the same situation later. If that happens, you not only may lose your home, you also have lost your retirement funds for the future.
There was a reason you fell behind, and it may be best to move to another property with a lower monthly payment.
LTK: What other options do homeowners have to avoid foreclosure?
DM: Many people have special skills and talents that they can use to make more money on the side. With the extra money, apply this towards your mortgage payment and bills. Also getting a part time job can help supplement and help you get caught up.
The main thing to remember is that if you are facing a financial crisis that includes a foreclosure, you will eventually come out of it and be able to rebuild your life and finances. Nothing is forever!
Caution for Struggling Homeowners
LTK: What warnings do you have about predatory lenders who prey on struggling homeowners?
DM: Beware of any companies that take upfront money with the promise to reduce your loan balance, lower your interest rate, or modify your loan. Many people have fallen prey to these companies and have paid thousands of dollars with no results, or worse yet, the company left town or went out of business.
If you want to get a loan modification, do it yourself by contacting your lender or contact a non-profit credit counseling company to help you.