Many homeowners are facing foreclosure as the economy becomes more and more uncertain. We have the knowledge to put out this article because we work with homeowners facing foreclosure. If they’re in Massachusetts, one of their options is to sell their home to us. However, that’s just one option that we can help them obtain.
In fact, plenty of creative solutions don’t even require them to leave their house or take on another loan.
Let’s dive into a few alternatives to help you avoid foreclosure.
11 Foreclosure Alternatives
Ideally, you have a little foresight and the ability to sell your home. If that’s the case, find a local agent you can trust. Even if you haven’t fully paid off your home, a sufficient increase in value since the purchase date may mean a big enough payoff to pay the bank and have money left over.
If you’re reading this article on behalf of someone else, understand that selling isn’t always an “easy” option for people in pre-foreclosure. They likely lack the money to move out and find somewhere to live. Staying put and watching the clock tick away seems like the best option.
They won’t see any equity they have in the home if tax liens, medical bills, and other debts add up to more than the home’s worth. The primary lender doesn’t have to pay off those liens if they foreclose. The homeowner does if they sell.
The biggest stumbling block with selling through an agent is the race against time. Before you can get offers, you may need to stage your home, make repairs, and disrupt your life. Once you find a buyer, they need to get approved for financing. Whether the sale will go through before the foreclosure deadline is a gamble.
Mortgage forbearance is an agreement between a mortgage lender and a borrower in a situation where the borrower cannot pay their mortgage. Under this agreement, the lender allows the borrower to pause or reduce mortgage payments temporarily. This arrangement is beneficial during financial hardships such as job loss or illness.
The forbearance agreement is designed to provide temporary relief and is not a permanent solution. Typical forbearance plans last 3-6 months, but you can ask for an extension. After the period ends, the borrower must resume payments and typically has to make up for the missed or reduced payments. Debtors do this through various repayment plans, such as paying extra on top of regular payments, a lump sum, or extending the loan term.
Deeds-in-lieu of Foreclosure
A deed-in-lieu is a financial arrangement in which a borrower, unable to make mortgage payments, voluntarily transfers the ownership of their property to the lender to avoid foreclosure. This is typically used as a last resort when other options like a mortgage modification or property sale are not feasible.
Banks don’t always accept deed-in-lieu requests for various reasons like a second mortgage, liens on the property, or damage to the property.
You may feel embarrassed by your financial situation. And enduring the full foreclosure process is excruciating. A deed-in-lieu is a way to minimize the embarrassment of a foreclosure.
A short sale refers to selling a property for less than the balance owed on the mortgage loan. Short sales help homeowners avoid foreclosure when they cannot continue making mortgage payments, and the home’s value has fallen below the amount owed.
For a short sale to go through, you must get your lender’s permission. If you have multiple mortgages, yup, you have to get all of your lenders to agree. This process requires a lot of negotiation and meeting the bank’s (often asinine) terms.
I hope our bank isn’t reading this (they’re actually great). But many people get bad advice and work with incompetent lenders.
Your bank may allow you to enter a repayment plan if you’re behind on your mortgage payments. If you took a mortgage forbearance, you’ll start a payment plan after the period ends.
Make sure you understand the requirements and that you can make the payments. Repayment plans add a portion of your past-due balances for several months until you’re caught up. Repayment plans are helpful if you’re not eligible or can’t refinance because extra monthly payments will be too expensive.
When you file bankruptcy, an “automatic stay” temporarily stops all collection actions against you and your property. This stay includes foreclosure sales.
Most individuals file under Chapter 7 (liquidation) or Chapter 13 (reorganization).
- Chapter 7: This chapter provides for “liquidation” – the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. To qualify, you must pass a means test, which compares your income to the median income for a similar household in their state. If the income is too high, they may not be eligible and have to consider Chapter 13 bankruptcy.
- Chapter 13: This chapter involves debtors proposing a repayment plan to pay off creditors. These repayment plans usually last 3-5 years and seek to pay off all or part of their debts. Unlike Chapter 7, Chapter 13 doesn’t involve liquidating assets. It’s often chosen to avoid foreclosure on a home, allowing debtors to catch up on missed mortgage payments.
Will Bankruptcy Affect My Credit?
- Chapter 7 bankruptcy stays on a credit report for seven years. Expect to lose anywhere from 150 to 150 points on your credit score. The higher it is, the more points you’ll lose.
- Chapter 13 bankruptcy stays on a credit report for ten years. Again, expect to lose anywhere from 150 to 150 points on your credit score.
While governed by federal law, the bankruptcy process includes certain state-specific exemptions and nuances.
Note: Individuals must complete credit counseling from an approved agency within 180 days before filing.
Rent Or Lease Out
Being a homeowner is a rewarding experience, partly because you can live in the privacy of your own home. If you’re in foreclosure, know this. We are not legal experts and this is not legal advice, so do your research. It’s possible you could rent or lease out your home while in foreclosure so long as you notify the potential tenant of the foreclosure.
This strategy can help increase your cash flow and repay your mortgage. You can use short-term rentals like Airbnb or find a long-term tenant to give you consistent income.
Renting out your home is not easy peasy because being a landlord is a big responsibility. Ensure you know your obligations and tenant rights before entering an agreement. If your cash crunch is a short-term situation, consider month-to-month leases. This way, you can facilitate speedy termination and find the right tenant.
A loan modification is a change made to the terms of an existing loan by the lender, typically as a response to the borrower’s long-term inability to repay the loan as originally agreed. The bank takes what you owe and puts it on the backside of your loan. It’s a win-win for the bank because they tack on what you owe to the end of your mortgage.
The goal is to lower the monthly payment to a level the borrower can afford. It’s different from refinancing, as it modifies the existing loan rather than replacing it with a new one.
Refinancing your home means replacing your existing mortgage with a new loan, often to achieve better terms, such as a lower interest rate or different loan duration. This can reduce monthly payments, helping to avoid foreclosure. Banks might expedite refinancing for borrowers facing foreclosure, but it depends on the lender’s policies and the borrower’s financial situation.
To increase the chances of acceptance, improve your credit score, maintain a steady income, accumulate home equity, and reduce other debts. Of course, this advice isn’t applicable if you’re facing foreclosure.
Reverse mortgages are only available to homeowners aged 62 and older. They allow homeowners to convert part of their home equity into cash while retaining homeownership.
The borrower receives funds as a lump sum, fixed monthly payment, or line of credit, and no repayment is required as long as they live in the home. However, the borrower must maintain the property and pay property taxes and homeowners insurance. Upon the borrower’s death, sale, or move out, the loan must be repaid, typically through the sale of the home.
Last, but not least is selling your home to a cash buyer. It’s likely that when you list with an agent, you receive cash offers. You can find cash buyers without listing with an agent. This can be financially savvy, especially if you and the cash buyer go the no-agent route.
Selling to a cash buyer allows you to reverse the cards on your financial situation.
- You need to sell your house fast before the foreclosure auction? A cash sale can close in as little as a week.
- You don’t want to deal with listing your home and everyone in the neighborhood knowing you’re selling? Selling to a cash buyer is discreet.
- Your house needs costly repairs? The point of selling to a cash buyer is that they’ll be responsible for repairing the property.
- You know your financial situation will improve in a few years, but you must keep your credit intact. A lot of the options on the list can help that, but a cash-buyer sale is a surefire way if you can’t sell through the traditional route.
Cash buyers can be anyone from real estate investors to move-in-ready individuals with the liquid assets to purchase a home. Cash sales close quickly, and in our mind, cash offers are better when you’re in a pickle financially.
11 Ways To Stop A Foreclosure
The #1 reason people lose their home to foreclosure is because they don’t have any money and don’t know their options. We deal with many preforeclosures, so we can confidently say that you have options. Even if your last resort is a cash offer, find a reputable company like New England Home Buyers to help you get the deal done.
We can help you walk away with some cash in your pocket. We handle things respectfully so you can walk away with dignity intact. If you’re facing a foreclosure auction or you’re close to going into default, get help ASAP.
A great place to start is our blog. Mainly our blog detailing the Massachusetts foreclosure process. You may also find value in our post discussing when it’s too late to stop a foreclosure. If you’re not in Massachusetts, you’ll still find value in these posts since the process doesn’t differ much between states. However, find applicable information for your state.