In This Chapter
Buying time with bankruptcy and other legal options Keeping your home and working out the details Selling your home and starting fresh with a little cash Walking out on your house
Deciding to do nothing — the worst approach
W
hen you’re facing foreclosure, slipping into panic mode is far too easy, and panic can often blind you to the many options you have at your disposal. The earlier in the process you begin to consider your options, the more options you have available.This chapter reveals an entire menu of options from which to choose, some of which may be available to you and others of which may not. Your options generally fall into four categories:
Stay in the home.Work with your lender and others to resolve the prob- lem, or sell to an investor and buy or rent the home from him.
Sell your home.Put the property on the market, sell it, pay whatever you owe on it, and then take the rest of the cash and move into more affordable accommodations.
Take a hike.Move out and let the bank deal with the mess.
Stall.Take advantage of your rights as a homeowner, and put off the foreclosure for as long as possible while exploring your options.
The people coming by and offering to “help” you out of your current dilemma may not present you with all your options, so be careful when a self-proclaimed philanthropist shows up to offer a helping hand.
This chapter lays out all your options — options that your bank or others may not be letting you in on. You can then choose which strategy is best for you and your family.
Filing for Bankruptcy
Filing for bankruptcy sounds like the ultimate sure thing, and it may very well be the best option for many homeowners buried in debt. Most of the people we deal with who eventually play the bankruptcy card go about it all wrong.
They try every other option, or simply sit around twiddling their thumbs and then, at the very last minute, when all other options have disappeared, they decide to file for bankruptcy. They usually end up in what we call the “bank- ruptcy mill,” where a hack attorney takes their money and provides little or nothing of value.
The right way to approach bankruptcy is to explore your options early. Even if you have no plans to file for bankruptcy, schedule a meeting with a rep- utable bankruptcy attorney (see Chapter 10), and see what she has to say about your situation. This initial consultation may even be free; if it’s not, it should cost no more than about $300, which is money well spent.
Is bankruptcy the right option for you? Well, that depends on several factors.
Generally speaking, however, if you owe just a few thousand dollars in back payments, don’t have a lot of other debt (such as credit card debt), and can catch up on your payments, then filing for bankruptcy may be a little drastic.
If you’re drowning in debt and doubt that you’ll ever have the resources to catch up, then we strongly encourage you to consult a bankruptcy attorney.
Holding Onto Your Home: Is It Possible?
Homeowners who receive a foreclosure notice often automatically assume that they’re going to lose their home. They don’t have the cash to catch up on the payments, they’re falling behind on their other bills, and they can barely afford groceries. How can they possibly expect to keep their home?
Well, several options can keep you in your home, and you may want to con- sider them. Moving out may not be something you want to consider, particu- larly if the home has been in your family for some time or you don’t want to uproot your children and move away from their schools and friends. What- ever the case, if moving out and moving on are options that you don’t want to consider, then look at some options that can keep you in your home.
Working out a deal with your lenders
Most lenders have a lot to lose by foreclosing on homes. In addition to losing you as a customer, your bank has to take possession of the property, fix it and clean it to place it back on the market, hire a real estate agent to sell it, and pay the agent a commission. The bank also has to declare that it has a bad loan on its books, which can draw the scrutiny of bank regulators. In short, your bank doesn’t want to foreclose on your house.
This is good news for you, because it gives the bank more motivation to work out a deal with you, especially if you have little, no, or negative equity built up in the property — in other words, you owe more on the property than what it’s worth.
In the following sections, we describe two options that your lender may be willing to consider — reinstating the mortgage or agreeing to a forbearance (a payment plan).
Reinstating your mortgage . . . with a little help from your friends
Reinstating a mortgage consists of catching up on your past payments, paying any additional interest and penalties your bank levied against you for those missed payments, and then picking up where you left off as if nothing every happened. This is usually the most attractive option, assuming that you:
Have a mortgage with a low enough interest rate to make this option attractive.If banks are currently offering mortgage loans at much lower interest rates than your current loan, refinancing may be a more attrac- tive option, reducing your monthly payments. However, if you’re in fore- closure, you probably have bruised credit and may not be able to qualify for a loan to refinance your existing mortgage. (See “Borrowing from Peter to pay Paul: Refinancing,” later in this chapter.)
Can obtain a the chunk of money you need to catch up on past pay- ments (usually by borrowing from relatives or friends).
Are able to increase income or slash expenses enough to start making your mortgage payments again.
The good thing about reinstating your current mortgage is that you pick up where you left off. The bad thing is that you pick up where you left off. In other words, it may solve the problem temporarily but set you up to repeat the same scenario three or four months down the road. Reinstating the mort- gage has several drawbacks:
You may not be able to borrow a sufficient amount of money to re- instate the mortgage, in which case, the option is off the table.
The bank may refuse to reinstate your mortgage,if you’re unable to prove that you can continue to make your monthly mortgage payments after reinstating the mortgage.
Reinstating usually requires you to borrow more money (unless your rich aunt decides to give you the money).You now have to make pay- ments on two loans — your original mortgage and the loan you took out to reinstate the loan. Are you going to be able to cut expenses and boost your household income enough to cover the additional payments?
Reinstating could result in throwing good money after bad.You may put yourself in a better position by stopping payments and saving your money in preparation for a move to more affordable accommodations (see Chapter 13).
Reinstating usually requires an influx of cash from family members or friends.
If you’re getting others involved, make sure you handle the situation appro- priately, so you don’t end up losing valuable relationships in addition to losing your house. (See Chapter 4 for details on how to borrow money from relatives and friends to get back on your feet.)
If reinstating the mortgage is simply going to buy you some time and put off the inevitable loss of your home, don’t do it. Instead, consider one of the other options discussed in this chapter.
Negotiating a forbearance: Payment plan, anyone?
If you’ve experienced a temporary financial setback, you may be able to work out a solution with the bank to restructure your payments and get back on track through a forbearance(payment plan).
In a forbearance, the bank can agree to accept just about any agreement and structure it however it sees fit. The restructuring may be held to certain good-faith restrictions and usury laws, and you may find a standard “reason- able” forbearance agreement with national lenders, but otherwise the bank can set it up however it wants. National lenders have formulas set up, and your plan must fit into that formula.
A forbearance arrangement is similar to reinstating the mortgage except for the fact that, with a forbearance, the bank may not require you to come up with a chunk of cash to catch up on missed payments and pay penalties and interest. Instead, the bank allows you to make up the missed payments over time (typically 24 months or less). If you owe $1,500 in missed payments and penalties, for example, the bank may allow you to pay an extra $150 per month for ten months until you’re caught up.
If you’ve fallen way behind your payments and your prospects of getting back on track look bleak, the bank is unlikely to agree to a forbearance, and you should be happy about that. You don’t want to place yourself in a situation in which you’ll ultimately end up right back in the foreclosure pit. If you can’t afford the monthly payments required by whatever repayment plan the bank offers, forbearance isn’t the solution for you.
Although you may be able to negotiate with the bank and leverage your poor financial position for a more attractive deal, the bank is pretty much in charge.
Your bank is going to ask you to provide financial information and prove that you’re going to be able to honor any repayment agreement it draws up. When negotiating a forbearance, tread lightly — if you come across as someone who’s difficult to deal with, the bank may wash its hands of the whole thing and cease to work with you. (For additional advice on how to work with your lender, check out Chapter 11.)
Working out a mortgage modification
A forbearance agreement allows you to catch up on missed payments over time (see the preceding section), but your mortgage remains unchanged. As soon as you catch up on the missed payments and any penalties, you pick up where you left off.
To give you even more time to make up missed payments or to make your monthly payments more affordable, your bank may be willing to negotiate a mortgage modification— an entirely new mortgage that replaces your current mortgage. With a mortgage modification, the bank has much more flexibility and can modify the mortgage in any of the following ways:
Adding to the principal the amount due:Your bank may agree to roll the amount owed in missed payments, penalties, and interest into the total loan amount, enabling you to pay off the past due amount over the life of the loan.
Lowering the interest rate: If you have a mortgage with an interest rate that’s much higher than the going rate, your bank may be willing to lower your interest rate. A 1 percent to 3 percent decrease could save you hundreds of dollars per month.
Changing the terms of the loan:The bank agrees to adjust the terms of your loan to meet your financial situation. For example, the bank may tack on several months to the end of the term in order to recoup missed payments along with penalties and interest.
Unfortunately, a mortgage modification isn’t always an option. When a bank sells your mortgage, the loan servicer who processes your payments may not have the power to negotiate a mortgage modification. However, it can’t hurt to ask.
Borrowing from Peter to pay Paul: Refinancing
Depending on your situation, you may be able to refinance your way out of the foreclosure swamp, assuming, of course, that your credit is not so dam- aged that you can’t qualify for a fairly attractive loan. Following are some conditions that make refinancing a more attractive and realistic option:
You have equity in the home that you can borrow against.
You can reconsolidate all your debt so that the new monthly mortgage payment is less than the total you currently pay each month on all your other loans and credit cards combined.
You have sufficient income to cover the new monthly mortgage payments.
Consult a reputable loan officer in your area to discuss your refinancing options. Prior to the meeting, gather the information described in Chapter 6, so you know your net worth, the amounts of all outstanding debts, and your cash flow. Your loan officer can use this information to determine the best refinance package for you. (See Chapter 12 of this book for more about refinancing.)
Don’t take the bait if some mortgage lender who specializes in foreclosure bailouts dangles a high-cost loan in front of your face. The lender may charge you 8 points (8 percent of the total loan amount upfront), 14 percent interest, and your firstborn baby. The loans are usually sold off and you never hear from that mortgage company again. These loan sharks, er, lenders serve a purpose — the loan can solve the current crisis and buy you time to work toward a more permanent solution. But be careful: When people are desper- ate, they’re often willing to sign anything, and the con artists know it — as do the banks that specialize in high-risk loans.
Before you jump at the chance to refinance your way out of foreclosure, do the math. Say your house is worth $125,000, and you owe $95,000 on your current mortgage — a $100,000 loan you took out a few years ago at 8 percent inter- est. A lender offers to refinance the mortgage for you with a loan for $125,000 at 13 percent interest. That $30,000 or so you would get at closing would sure make life great right now, but it would also boost your monthly mortgage pay- ment (principal and interest) from $723 to $1,380 — almost double what you were paying. How long could you sustain that? Maybe you would be better off selling the home and using the proceeds to buy something more affordable.
Bottom line: Refinancing is a great solution if you have the equity to borrow against, and the lender offers you a reasonable interest rate and requires you to pay no or very few points upfront. Don’t set yourself up for failure, and don’t let someone else do it for you, either. If you can’t swing it, you may be better off putting the house up for sale and walking with your equity instead of giving it all to a bank in refinancing costs.
Selling your home and buying it back: The ol’ give and go
Some real estate investors who invest with integrity may be willing to pur- chase your home directly from you or at auction, and then sell it back to you either on a land contract or via a lease-option agreement. We spell out these two options in the following sections.
Before entering into a land contract or lease-option agreement, run it past your attorney for review. Both of these types of contracts usually contain a forfeiture clause(see Chapter 5), which enables the investor to declare the agreement null and void if you fail to honor your end of the agreement. For example, if you miss a single payment, the investor may have the legal right to evict you, retain possession of the property, and keep your deposit and any down payment or rent you already paid. If the investor tries to talk you out of seeking legal counsel, you should be doubly careful.
Land contract (or contract for deed)
With a land contract(also called a contract for deed), the investor buys the property and then sells it back to you. In some cases, the investor may be able to offer you lower payments than your bank is currently charging.
However, you have to be careful with this option. The investor must buy the senior lien(first mortgage) at auction, or have the lender assign the senior lien to him and proceed with the foreclosure in order for the junior liens (claims that are lower on the pecking order) to be erased. If the junior liens are not erased, and you buy back the property, these liens could reattach to the property, and you’ll be responsible for paying them off.
Lease-option agreement
With a lease-option agreement, the investor buys the property and leases it to you for a fixed period of time, after which you have the option to buy back the property. Normally, the investor requires 5 percent to 10 percent down, which should be applied to the purchase price, along with monthly rent equivalent to about 1 percent of the purchase price.
A lease-option agreement can be a great solution, assuming you’re working with an investor with integrity and you have a great plan in place for getting your finances in order by the time your option to buy the property rolls around. The lease option is typically most useful for homeowners who need more time to secure financing or fix something on their credit report, or who are waiting for an insurance check or some other payment. (See Chapter 5 for details about lease-option agreements.)
Selling your home and renting it back
Another way an investor can assist you through the foreclosure process is to buy your home and then lease it back to you for several months or even years until you’re ready to move. This option is especially attractive for cou- ples who have children in school. If the foreclosure occurs in the middle of the school year, you may be able to rent the property until summer break. Or if your children are nearing their high school graduation, the investor may agree to lease the property to you until your kids graduate.
Many real estate investors are willing to wait if they know they can earn long- term profits by renting out the property, assuming they believe that you’ll take care of the property. Make sure the investor knows that you’re willing and able to properly care for the property for the duration of the lease.
Otherwise, the investor may think that reselling to someone else is in her best interest.
Watch out for shady investors and other people who show up at your door offering assistance, especially those who show up at the eleventh hour. These wolves in sheep’s clothing may be out to fleece you. The information we pro- vide in Chapter 9 can steer you clear of these shysters.
Getting Out from Under It: Selling Your Home
For about 90 percent of homeowners facing foreclosure, selling their home is the best option — assuming, of course, that they have some equity built up in the house. By selling the house, you can cash out the equity instead of giving it to a bank in refinance charges or to an investor who buys the property for pennies on the dollar at auction. You can then use the proceeds from the sale to secure more affordable accommodations, such as a smaller house in a neighborhood that’s not so pricey.
Unfortunately, most homeowners facing foreclosure put off doing anything about it until the option of selling their home is no longer available. An excel- lent real estate agent may take as long as three to six months to sell your property, depending on the market, so if this is an option you want to consider, read through the following sections in a hurry, and then put the book down and find yourself a great agent to list the property for you. (Chapter 13 gives you some pointers on selecting a qualified real estate agent.)