How To Avoid Foreclosure
Avoiding Foreclosure
If you are like most Americans, I’m guessing that typing those words into the search bar made you sick to your stomach. And why wouldn’t it? The thought of losing a home that you have worked so hard to buy and care for is disheartening. Added to this feeling are the situations that caused you to begin missing payments:
The death of a breadwinner or other family member
Unemployment
Out of control payments due to adjustable rates
Divorce
Disability
The list could go on, but the fact is many people don’t know where to turn when they aren’t able to make their payments. Unfortunately, many people’s reaction to this uncertainty is to ignore the issue and let the late-payments pile-up. This is a sure-fire way to ruin your credit and lose your home. That is why it is important to have an understanding of how foreclosures proceed and what your options are as a consumer. Banks do understand that people face hard times and as we will learn, they are motivated to work with you during those times.
We will get there. First, let’s start by understanding what you signed when you got your mortgage.
Mortgage vs Promissory Note
Many people assume that when they buy a house that they take out a mortgage with the bank to pay for their purchase. This is sort of true. You do in fact sign a mortgage when you borrow money to buy a house, but the mortgage is actually the tool that you use to secure the loan. The loan itself is a promissory note, not a mortgage. So really, you have signed two documents. The first says, “I am borrowing this money and I promise to pay it back under the terms of this contract.” The second document says “Hey, that money I promised to pay back? If I don’t perform you have the right to foreclose on my property to recover some of your money.”
This is an important distinction because many individuals believe that if they allow their home to go into foreclosure all their problems with the bank will disappear. But as we know understand, you signed two documents. When your home is foreclosed upon and the resulting auction sale does not satisfy the promissory note, there is still a judgment against you! So when you are tempted to just let the system play out, imagine a bunch of investors bidding on your house, trying to get it for the lowest amount possible. The bank is motivated to sell it quickly not to get every penny out of it.
Understanding the difference between the Mortgage vs Promissory Note should motivate you to identify a solution before it gets to this point. There are a number of ways to solve this problem. Understanding your options is key to saving your credit.
Pick up the phone
The absolute best thing you can do is avoid hiding the situation. If you have missed a couple of payments, your lender already knows you are behind. GIVE THEM A CALL. The bank knows foreclosing on your home will cost them time and money and usually it doesn’t cover the remaining promissory note. Do you know who is most likely to fulfill the loan? The person living in the house who calls it home! Banks are motivated to find a solution to your late payments because if a solution is agreeable, they know you are far more likely to recover and continue paying the house back in full. There are a number of solutions you and the bank can use depending on your situation. Here are a few of them:
Repayment Plans: In this situation you and the bank agree to take what you owe them and spread it out over a certain period of time. For instance, if you missed the last 2 months at $600 per month, the lender may be willing to spread that $1,200 over the next 6 payments. You then owe $800 per month for the next six months and avoid foreclosure. This is a potential solution for someone who had lost income temporarily but will be able to make payments in the future.
Forbearance: This is also a great solution for individuals who are experiencing a temporary drop or loss in income. Forbearance is a fancy word for extra time. Here, the bank decides to delay taking legal action for a period of time. During this time you and the lender will need to agree on the length of the forbearance and what will be paid, if any, during it. The lender may require you to make partial payments or to keep up with the interest payments. These are all negotiable but they are dependent on the lender’s confidence that you will be able to repay your loan. If you can show a path to returning to being an on-time customer, you have greater flexibility in forbearance.
Refinance: If you are credit-worthy and have some equity you may be able to refinance your house to avoid foreclosure. This may be done with your original lender or another bank. This solution will not work for everyone, but being able to lower your payment by extending the term, taking advantage of lower rates, and re-amortizing the principal is a great way to provide some relief to your family. For instance, if you originally signed a 30-year note for $110,000 at 5.5% interest your payment, less any insurance, taxes, escrow, would be $624 a month. If you lived in your house for 15 years, and were able to get a 4% interest rate your new monthly payment would be $365 a month. Remember, that you have no re-amortized your loan so it will take another 30 years before you paid it off, but you can figure that out later. In the near term, you will be saving your home.
Note Modification: Because lenders are very interested in avoiding foreclosure, they may be willing to adjust your original loan to make it easier for you to stay current. There are a lot of tweaks they can make: lowering or fixing interest rates (especially if you had an adjustable-rate mortgage or ARM), reducing principal through debt forgiveness or extending the current term. While it may not seem like much, a half or full percentage point of interest can greatly reduce your payment. Your lender may be willing to take a lower return on your loan than spend the time and money of going through foreclosure.
Payment Forgiveness: This is generally the least likely option of all of these, but depending on your payment history and the lender, you may be able to ask for them to waive your missed payments. Though rare, if you are able to demonstrate to the lender that you will be able to get back on track with payments they may consider this option.
Overall, it is important to know that your lender is motivated to work with you. You have options to avoid foreclosure but it depends on you working quickly. If you would like support in evaluating your situation or speaking with your lender, Olive Tree Properties is more than happy to serve you by evaluating your budget and helping you work with your bank. We do this at no cost to you, and as creative problem solvers we most always can find a solution to what you are facing. You can contact Olive Tree Properties by email or by phone.
The foreclosure process
As discussed before, the earlier you can begin avoiding foreclosure the better. As the process progresses you will have fewer and fewer options. Let’s take a look at what lenders must do to foreclose on your mortgage. Because foreclosure laws vary so much state to state, it is important to do more reading about your specific state laws. Here we will mostly be discussing the Indiana Foreclosure process which is essentially a lawsuit between the borrower and the lender
Early in the process, once you begin missing payments you are in what is known as preforeclosure. During this stage lenders are just beginning to file legal documents and send out required notices. Generally the lender will have to wait a certain period of time before they can begin filing these documents. Sometimes they may have to wait as many as 120 days. In Indiana the lender is required to send a notice 30 days prior to starting the foreclosure. This notice informs you of your default and explains some of the options you have to avoid the foreclosure process. This letter will also explain what you can do if the lender is granted foreclosure. If you receive this notice you still have time to act. The lender has not filed any court documents and your credit can still be saved during this time (your late payments will still show up, but you won’t have a foreclosure on your record).
While every state is different, foreclosure procedures can move fairly quickly with lenders receiving judgments in a few short months after filing a suit against you. After they win the lawsuit your home will head to a sheriff’s sale where individuals will bid on the property to help offset the judgment against you.
As we discussed earlier, your home selling at the sheriff’s sale is not the end of the process. If an investor buys the home for less than what you owe the lender and the lender was granted a “deficiency judgment,” the leftover amount is still your responsibility to pay that off. The lender is able to recover this amount through normal collection practices. If this is too much of a hardship, you may have to consider bankruptcy to completely remove the deficiency judgment. This is why it is important to solve the problem while you still have options.
How to stop foreclosure
Let’s say you acted bravely and chose not to ignore your situation. You scheduled a time to talk with Olive Tree and we worked through your budget and found some options that would work for you. We called your lender together and laid out what we could do. Unfortunately your lender chooses not to work with you. What can you do now? Well we aren’t done yet, there are still some ways for you to keep your family safe and your credit intact.
Sell The Home: A local trusted real estate agent is a great resource during this time. Understanding what your home is worth and how quickly it could sell at different price points is valuable information. While selling your home through an agent can take time, if you list your home early enough you may be able to use this method. Olive Tree Properties knows a number of excellent realtors in Fort Wayne, IN who can be trusted to give you great advice. If you are interested you can email us here for more information. An important note to consider: Once your home is listed, it may need to be cleaned and staged to get great offers. Further, you may have to wait on inspectors, appraisers, the buyers financing approval, and then contractors to make repairs found on the inspection report. These things can all take time and are important to consider. If you would rather not deal with the hassle of all this, or if you are running out of time, a professional home buyer like Olive Tree Properties might be your best option. You can fill out this form to get your cash offer from Olive Tree quickly or you can read more about the three ways to sell a home here.
Deed in Lieu of Foreclosure: Here you would come to an agreement with the lender to sign over the deed of your house “in lieu” or “instead” of going through foreclosure. This keeps a foreclosure from hitting your credit, but it is important to note that in Indiana, lenders may still be able to pursue a deficiency judgment as we discussed above. You will need to work with an attorney to make sure you are protected from this. When reviewing the agreement between you and the lender, it is important to ensure they have waived their rights to collect on the difference between the remaining principal and the fair market value of the house.
File for Bankruptcy: While this is the last resort for many people, filing bankruptcy will stop any sort of collection and foreclosure proceedings. You will need to speak with an attorney to determine if this makes sense for you, but we believe there are many other options before pulling this parachute string. If you are considering bankruptcy to alleviate a housing problem, speak with us first by phone or email to discuss if this option is really the most beneficial for your financial situation.
The most important thing to remember during this time is that you have options and people who can support you. Be brave and reach out. We can help you solve this problem.
Resources during Foreclosure
While heading towards a potential foreclosure it is important for you to surround themselves with honest professionals who are going to give you reliable information and help you think through the best solution for you and your family. Here is a list of people you should consider contacting during this time:
An Honest Realtor: A realtor is going to be an invaluable resource to help you determine how much your home is worth and if you have enough time to sell it prior to the foreclosure process. If you head into a short sale situation a realtor is going to be a key part of your team while negotiating with your lender. If you do not have a realtor you can trust, please contact us and we would be thrilled to put you in touch with a professional you can trust.
A Real-Estate Attorney: While we do our best to be knowledgeable about real estate law, we are not an attorney and nothing we have provided here should be considered legal advice. In very complicated situations, or if you need to be represented in a foreclosure suit, it is best to have a strong real estate attorney. Again, we are happy to connect you with attorneys in the area that we trust.
A Skilled Professional Home Buyer: The last key to a strong foreclosure avoidance team is a skilled professional home buyer like Olive Tree Properties. Olive Tree Properties is ready and able to work with you on negotiating with your lender on any of the above strategies. And if while working through your budget it becomes apparent that a home sale will need to occur quickly, Olive Tree Properties can make you a cash offer on your home and close quickly so you and your family can close this chapter and get on with life with your credit and dignity intact.
Conclusion
During these times it is easy to feel overwhelmed and want to avoid thinking about your situation, but avoid the temptation of ignoring a potential foreclosure. It will not go away. Instead, reach out to us quickly so we can help you think through options. We are committed to investing in people like you. We want to see you save your home, and in the unfortunate situation that you may need to sell your home, we would be honored to help you walk away with equity and dignity knowing you worked quickly to make the best decision for your family.
If you are interested in learning more don’t hesitate to reach out to our team at Olive Tree Properties by giving us a call or shooting us an email.