Dave, kind of far afield, but my sister’s about to have the bank foreclose on her home and she’s freaking out. Are there ANY alternatives she can explore, or should I just rearrange my basement so she can stay with me?
This is definitely far afield from what we usually talk about here on Ask Dave Taylor but I feel your pain, well, the pain and fear of your sister, and since I know that it is a common question, I am glad to see if I can help a bit.
Even better is that I actually was at a workshop recently that was held in a realtor’s office and it’s no surprise that lots of their customers are more than just curious about foreclosure and what alternatives they might have, even as they look for new houses (or, more likely, try to sell their house for more than they owe the bank, even as a last ditch effort), so they had an interesting Alternatives to Foreclosure: And foreclosure scams to avoid fact sheet. That’ll be the basis of my information here.
First off, the Federal Trade Commission offers a useful sheet on alternatives to foreclosure too, if you want to start there. Their main advice, however, are the following:
You, the borrower, pay the lender the entire past due amount plus late fees and penalties, by an agreed-upon date.
This works best for solvent borrowers whose payment problems are temporary.
The lender gives the borrower a fixed amount of time within which they need to pay the past-due payments by adding a portion of them to the regular payments. In other words, if your usual mortgage payment is $1100/month, you might pay $1400/month until you’ve paid the back debt and penalties.
This is best for solvent borrowers who have only missed a small number of payments.
After negotiation with the mortgage company, payments are reduced or suspended for an agreed-upon amount of time. At the end of that time you resume regular payments plus a lump sum or additional partial payments (as in the repayment plan) for a number of months to bring the mortgage loan current.
This works best for solvent borrowers who are facing a temporary reduction in income (for example, temporary disability).
The borrower and lender together agree to change one or more terms of the mortgage loan, and contract to make payments more manageable. Modifications can include reducing the interest rate, extending the terms of the loan or adding missed payments into the outstanding loan balance.
There’s apparently a Mortgage Forgiveness Debt Relief Act of 2007 that can help you in this regard if you choose to proceed with these discussions with the bank (or if your sister does, or you help her in this regard).
This woks best for either solvent or insolvent borrowers who face long-term income reduction or unmanageable, increasing adjustable rate mortgage (ARM) payments.
Another way you can avoid foreclosure is to sell the house. Obviously you need to sell it for more than the outstanding balance of the mortgage, but many lenders will delay or postpone foreclosure proceedings if there is a pending sale or a borrower lets them know that they’re putting the home on the market.
This works best for solvent borrowers whose homes are worth as much – or more – than the loan balance.
In this situation, the lender will allow the house to be sold for less than the existing loan balance and it is only used when the lender agrees to take a loss on the transaction rather than go through the expense and hassle of foreclosure.
This is best for borrowers who are insolvent or have homes worth less than the outstanding mortgage balance.
With the permission of the lender, the homeowner transfers the deed of the house to the bank or mortgage company in return for cancellation of the remainder of the debt. Although the homeowner obviously loses their home and any accrued equity, a deed-in-lieu is still less damaging to your credit than a foreclosure.
Declaring personal bankruptcy is generally considered a last resort because it’s so brutal on your credit worthiness and future ability to buy a house, or even rent or, in some cases, get a job. A bankruptcy stays on your credit report for ten years.
This works best for insolvent borrowers who cannot pay their debts.
FHA and VA Alternatives
You can check on the respective sites, but if you have an FHA or VA loan with your house, or your sister does, check with the agencies because they have various alternatives to foreclosure.
There are a lot of scammers out there, companies and individuals who will offer what seem like pretty good deals but are often just ways to trick you into signing your deed over to them, leaving you with the mortgage loan and no property. Not good. In specific, be careful of “foreclosure prevention specialists” or “lease/buy back” scams.
I hope your sister can work this out. The first step is for her to call up the mortgage company or bank and have a very frank discussion with them about her situation and what options they have for proceeding. Scary stuff.