Wednesday, August 20, 2008

6 Alternatives to Foreclosure

Hopefully this article will be absolutely useless to everyone who reads it. Unfortunately I know that there will be too many who can benefit from the information offered here. The place to begin is to take a hard look at your financial situation.

Create a budget - Plan out a spending strategy for the next several months. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In rare circumstances it could make sense to skip payments on some bills so you can continue to pay your mortgage. Another option to consider is to borrow money from friends or family, or perhaps even tap into your retirement funds. Do the latter only if you're convinced you can make future payments; you don't want to drain your retirement funds if you're only going to end up losing the house in the end.

Check your refinance options - If you have equity in your home, if your credit rating is relatively intact and if your lender hasn't yet filed a notice of default, you may be able to get another loan with more affordable payments. An experienced mortgage broker can let you know your options. If you choose this option, be careful not to jump into a risky loan.

Be realistic - Many times, people struggle to hold on to a house they simply can't afford when they'd be far better off without it. It may seem harsh, but it's better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure.

Get organized - If you decide to contact your lender and try for a loan modification, you'll need to prepare a small mound of documentation. The lender will specify what is needed, but typically you'll be required to supply the details of your financial situation, your budget, documentation of your hardship and a "hardship letter" that outlines, in virtual detail, the circumstances that led you to fall behind in your payments and the improved circumstances that will allow you to get your financial life back on track.

You may also be required to provide a market analysis of your house. This will document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell. If a loan modification or refinance isn't possible or feasible, your options are limited to these:

Sell - If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You'll preserve what's left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future.

Negotiate with your lender for a short sale - If you owe substantially more on your home than it's worth, you may be able to get the lender to accept less than it is owed by negotiating a "short sale." In a short sell, you essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit. You have to consider the downside. A short sale can further damage your credit scores, often showing up as a "settlement" on your credit report. You may also face an IRS bill on the unpaid debt, which is generally considered income to you.

Allow the foreclosure to proceed - This is generally the worst choice. In some states and in some circumstances, the lender can even go after you in court for any deficit between what the home sells for and what you owe. An attorney or housing counselor can let you know if that's a possibility.

Even if the worst happens, though, the damage to your financial life needn't be permanent. If your situation improves, you may be able to get another mortgage, at a reasonable interest rate, within a few years.