A foreclosure is a legal proceeding that takes away a homeowner’s right of owning or redeeming the home that the mortgage covers. The following are ways to avoid a foreclosure:

1. Don’t ignore your problem.

Hiding your head in the sand will only get you further behind on your debt. It only becomes harder to reinstate your loan and become current. Losing your house will become a reality.

2. Contact your lender as soon as you realize that you have a problem.

Trust me, your lender WANTS to know what is going on. A lender does not want your house. They have far to many homes already. Not only do they have options to help you through this difficult time but they know your options, possible options you do not know.

Forget the embarrassment you feel by calling. Seeing your name in the newspaper stating you are being foreclosed on will be far more embarrassing then a phone call.

Calling early gives you more options. You need options at this point. Do I need to say that the problem will not go away if you ignore it! I guess I just did. Don’t hide your head in the sand.

3. Open ALL mail from your lender and respond to it quickly.

In most cases the first letter you receive will be advising you of your late payment status. It should include information about preventing a foreclosure. In a short time you will receive information regarding pending legal action. Lets talk about this. Ignoring these communications will not help your position. Claiming you never received these letters will also not help your case. If you do not respond your lender will undoubtedly contact you by telephone.

Listen to me; it is extremely important that you respond to all mail and phone calls from your lender. If your lender doesn’t hear from you, they WILL start legal action ultimately leading to foreclosure. Not only will this limit future possible resolutions but these actions will only tend to increase the cost of bringing your loan current.

4. Know the rights granted by the contract you signed.

Read the loan documents you signed. Look for all information with regard to what your lender may do if you fail to make your payments. You must familiarize yourself with the foreclosure laws in your state.

5. Getting help with foreclosure prevention.

The government has put together a lot of valuable information about foreclosure prevention. You can view this information at: http://www.fha.gov/foreclosure/index.cfm.

6. Cut your spending.

Keeping your house should be your first priority. Consider what expenses can be cut in order to make your mortgage payment. Look at “luxury” expenses such as cable TV, gym memberships, eating out, going to the movies, and any other entertainment that can be eliminated. Maximize your other payment in order to stall payments to non-critical debts.

7. Use what you have to produce cash.

What can you sell to help get out of this predicament? Do you have a second car, , motorcycle, boat, or jewelry that you can sell? Do you have life insurance you can borrow on? Can you or a family member get an extra job? Do what it takes to keep from losing your house.

8. Don’t fall for foreclosure prevention deals.

Let me ask, if you could afford $1000 to pay someone to save your home would it not be better to put that $1000 on your past due loan? This is the time when the “Help You” companies come out of the woodwork like cock roaches in the night. Think about it, you’re contacted by a guy that wants to argue your case to your lender and all he wants is $300. I have to believe YOU would be more sincere when talking to your lender then this guy. Do it yourself and do it early and often!

9. Don’t fall for foreclosure scams!

These people also come out at night. They try to convince you that they can save your credit and give you cash in your pocket too. It could happen but more than likely you will lose big. If they want your house for your equity plus $5000 cash I have to believe you could get $20,000 or even more in a sale. Never sign a legal document before getting legal advice. No one reads all the fine print and that’s where you will be hung out to dry. Seriously, people do not chase you down to give you money unless it profits them unbelievably.

In the simplest terms, a foreclosure will occur when a homeowner is unable to make the principal and/or interest payments on the loan. This will ultimately result in the property being seized and sold.

The foreclosure allows the lender to recover the loan amount owed either selling or re-taking ownership of the property that was securing the loan. This is the process we have come to know and love as the repossession process. It all starts when a homeowner defaults on loan payments. The lender files a public default notice know as a Notice of Default or Lis Pendens.

In most cases the lender will take ownership of the property. The intent is usually to re-sell the property and recover the loan amount and associated cost. The lender can do a short sale foreclosure which is an agreement that is made with the homeowner in a pre-foreclosure process. The lender can also buy back the property at the public auction. When a lender repossesses a property the term used is bank-owned or REO (Real Estate Owned).

Stages of Foreclosure

Pre-Foreclosure

A pre-foreclosure is when a homeowner sells the property before a default and official foreclosure is started. The homeowner could walk away with something instead of losing everything and destroying their credit.

Notice of Default

A Notice of Default (NOD) is when a lender puts the homeowner on official notice that he/she is facing foreclosure. This will usually occur after three to six mortgage payments are missed. The Notice of Default is recorded at the County Recorder’s Office.

Notice of Sale

If the loan is not brought current within three months, an official sale date is determined. A notice called a Notice of Sale will be posted on the property. Neighbor’s love seeing official notices being posted on your house and will patiently wait for you to leave on an errand so they can read the notice. This Notice of Sale will also be recorded at the County Recorder’s Office. To add real insult to injury, this Notice of Sale will also be published in the local newspapers for a three-week period.

Foreclosure Trustee Sale

The Notice of Sale would have stipulated the time and location of the actual sale. The sale will usually be on the steps of the county courthouse. The property is auctioned to the highest bidder. The successful bidder must pay in cash. Now few people carry around hundreds of thousands of dollars in a briefcase. Usually a deposit is placed and the remainder of the money must be paid within 24 hours. Upon complete payment, the winner will receive a trustee’s deed to the property.

Foreclosure Auction

At auction, the foreclosing lender sets an opening bid on the property.

The opening bid is usually equal to the amount owed on the property; interest accrued on the loan, additional fees and any attorney fees incurred. To throw cold water on any potential real estate investors that hope to be the only bidder, the opening bid is considered as an opening only. If there are no bids higher than the opening bid, the property is normally purchased by the lender.

It makes little sense that after calculating all the cost that the lender would not accept THAT amount for the property. I have a thought about this and I believe the lender doesn’t want a bidder to get a really great deal on a property. The lender took all the risk, went to all the trouble getting the home back and selling it and some investor walks in and gets a deal by shaving $100,000.00 of the purchase price. Better to wait for the market to rebound and take the profit.

If the opening bid is not met the sale property is considered a Real Estate Owned property or REO. Consider that if the opening bid is the total amount owed or incurred and the lender sells for less the bank absorbs the losses.

The good news for investors is that with REO properties all liens are wiped out. The only amounts still owed would be any existing property taxes. A clear title is a nice reward.

Why is there a foreclosure problem?
Why are homes being taken over by the banks?
Why are people suddenly not able to afford their mortgage payments?

The problem really goes back a few years when banks had an abundance of money to lend and decided to lend that money at low teaser rates to people who were of questionable financial risk.

These teaser rates were the now famous ARMs (Adjustable Rate Mortgages). This ARM offered a very low interest rate for a few years and then increased to a rate usually above the prevailing rate. The bank lost a little on the front side but made it up as well as a lot more on the backside.

Many homebuyers took the risk because they had seen the home prices steadily increasing and wanted to get their piece of the pie. These homeowners had one of two plans. The first was to ride the teaser rate till it was due to expire and then refinance their loan. This would protect them from the higher rates as well as put money in their pocket from the increased equity in the house. Many homeowners refinanced and cleared $25,000 to $100,000 to use as they wish.

The second plan for many homebuyers was to simply buy the home at any interest rate, fix it up or not, and then sell it at a profit. There was a time when you could buy and immediately resell and clear $60,000 with NO fix up cost. You can see that the ARM meant nothing to these two types of homebuyers.

A gentleman in Orange County California refinanced three times in one year and cleared decent cash each time. The house of cards finally fell apart when the market tumbled and he was faced with the expiration of the teaser interest rate. His house payment increased from $3500 per month to $6000 per month. He lost his house.

Who has the highest foreclosure filing totals?

Nevada can boast the highest number of foreclosure filing for its population. The number equates to 1 foreclosure for every 75 homes. That’s 3.5 times the national average.

California has the highest number of total filings. In context, California has 10 percent of the nation’s population but has 18 percent of the nations foreclosures.

The nation’s top 10 highest foreclosure rate states are: Nevada, California, Florida, Texas, Colorado, Georgia, Michigan, Arizona, Ohio, and New Jersey.

The honor for the worst foreclosure rate within the country’s 100 largest metropolitan areas goes to Detroit. This “winner” had one foreclosure filing for every 51 households. That gives Detroit a foreclosure rate exceeding five times the national average.

What happens to those homes after foreclosure?

When these homes do go into foreclosure many are sold at action. In the most depressed housing markets as few as 1 in 100 homes up for auction are actually sold. That’s 99 out of the 100 homes up for auction at discounted prices never receive a bid equal to the starting bid set by the lender. Contrary to most myths, you can’t buy a $300,000 home for $100. All lenders reserve the right to bid and that means they will bid the opening bid if no one else does.

In many depressed markets the lenders are NOT offering sweet deals to move houses. Its not unusual for a neighborhood to have 3 of 4 homes foreclosed on and those homes sit empty for 2 or 3 years. They reject offer after offer waiting for the market to move back up.

True, some lenders move houses quickly at discounted prices but these are the few, not the many.

Another reason that many homes go up for auction and receive no bids is the fact that before potential buyers are allowed to bid, they must present a cashier’s check for the full amount they plan to bid. Few people outside of investors can pony up the full purchase price for a home. But, if you have $300,000 sitting in a CD account and feel like buying a house this week, you’ll probably get it.

In the good days YOU had to qualify. Now it’s your HOUSE that needs to qualify. If you owe anything near the current appraisal price, you’re toast. In today’s market a homeowner needs to think outside the box to save his or her home and credit.

First things first, the home in danger of foreclosure MUST be listed for sale. Selling to avoid a foreclosure is always better than the foreclosure. Did I say ALWAYS? Now the words of caution.

Almost every real estate agent will tell you that to get the very best price “you need to fix it up a bit!” Well that may be true but if you’re in foreclosure you are probably in other financial trouble too. This is not the time to go further into debt or to borrow from the relatives. If the market is depressed in your area, $10,000 in fix ups will make little difference and there’s a good a chance that it will still not sell.

I know every real estate agent in America will probably disagree with me and I know there is some validity to their thoughts. But here’s the point I will make: since I will make nothing from the sale of your house and they will, who’s impartial?

Another option is to try and work with your lender to arrange a short sale. A short sale is where the property is sold for less than what is owed on the loan. A short sale will pay off the loan and will do more to save your credit than the damage a foreclosure would have done.

Next stop if unsuccessful with the short sale is to ask your lender about giving you a deed in lieu of foreclosure. This is the “Give it Back” plan. The best part of this plan, if accepted, is that you are free of the debt. The mortgage company agrees to accept the deed instead of foreclosing on your home. You still lose the house but that was happening anyway. Time to move on!

It is always suggested that you check the Internet for foreclosure rules for your state. Some states allow a lender to continue collection activities after foreclosure by suing for a deficiency judgment.

The reality is that very few lenders sue for deficiency judgments. They know your financial situation and pursuing you would be more wasted money. Having said that I know of one major bank that seems to pursue everyone for every penny. It is probably to maintain a reputation as being hard on bad debts.

Being diligent and following through with all your options will benefit you in the long run. Do the research and make the calls. It’s your life and your credit. And more times than not, your lender does care about you and your situation.

1) How does a bankruptcy affect my credit report?

2) How does a foreclosure affect my credit report?

The reality is that a potential creditor will evaluate your credit report in total, if they see your credit report at all.

In all likelihood the only thing they will see is your credit “FICO” score. A FICO score is a way to determine the likelihood that you will pay your bills. FICO scoring methodology is shrouded in mystery. Additionally, the score can change at any minute as information about you is inputted into the computer. Even an inquiry can change your overall FICO score.

If you fail to pay a mortgage or loan payment for 30 to 90 days, that late pay will decrease your FICO score. If the lender begins the foreclosure process your FICO score will again suffer. Each step of the process will lower your FICO score more. The late pays, the Notice of Default, the judgments, the Notice of Sale and the auction will all lower your FICO score.

Make no mistake about it: a low FICO score will cost you in two important ways. One is that you will probably be denied credit for the next 7 years.

The second way is that if you are granted credit, you WILL pay a lot more in interest because of that score. I know it is hard to believe that a score can cost you but it could cost you $3000 or more on a new car purchase.

The mystery is just how much the foreclosure will hurt you FICO score. There is a science to it but the formula is guarded better then the KFC recipe.

Having said that, many experts feel that a foreclosure will decrease your FICO score anywhere from -100 points up to -150 points.

There is life after a foreclosure. You will probably be able to buy a home after a year or two. You will have to pay a higher interest rate and be prepared to put down a larger down payment then others might.

The longer you wait the better your FICO score should be. Of course you need to re-establish credit and improve the credit you do have. The credit report works on a 24-month schedule so by being diligent, you should be able to improve your credit in two years anyway.

After a review by your realtor friend you are told the bad news. Your home won’t sell for enough to pay off the balance of the loan, the fees, and of course the real estate commissions. Many people still try to sell their home but eventually they accept the fact that foreclosure is inevitable.

What is a Short Sale?

Many lenders have an abundance of homes that have been repossessed and are willing to settle debts owed by homeowners through a process known as a “Short Sale.” Simply put, a “Short Sale” occurs when a homeowner is upside down on their home loan. Unless they find a really giving investor the property will end up selling for less than what is owed on the mortgage loan.

In most cases a short sale would benefit a lender more than a foreclosure would. A short sale is a done deal. Money is received and a write off is taken. End of problem.

With a foreclosure the lender takes the house back and then has to dispose of it in order to mitigate his losses. If the house does not sell for months he carries the negative on the books. Additionally, there can be cost added to the ultimate sale that further reduces the loss recovery.

In a successfully negotiated Short Sale the lender agrees to accept the lesser amount and consider the loan as paid in full. Of course the homeowner will receive nothing from the sale of their home but that’s no surprise. The good part is that no foreclosure is reported against your credit.

Be warned, if the short sale was not done carefully and correctly the homeowner will still owe the difference between what was owed and what was received.

To qualify for a “Short Sale”, the homeowners must be able to demonstrate to the lender a real hardship and they must be financially insolvent. With your recent payment history it should be easy to demonstrate that you are unable to make your house payments. This is important. Otherwise there would be no reason for the short sale.

You will need a signed and accepted offer for your house. Finding a buyer is not as hard as it seems given the fact that this is a short sale and the house is probably going for a lot less than market value. A lender will not even look at a short sale package unless you have that offer.

Do I need a Lawyer to do a Short Sale?

Successfully negotiating a Short Sale is a difficult process. DO not consider doing a short sale yourself. You will need someone that is an expert in short sales. Your brother-in-law that read about short sales is not qualified. The short sale process will be a combination of negotiating with loan loss mitigation personnel and processing and submitting a ton of paperwork.

Lenders require a lot of documents and information. Giving the lender too much information or to many of the wrong documents can completely destroy your attempt. Additionally, the lender will want financial information about you the homeowner. You will need to demonstrate to the bank that you are insolvent. You need to give the lender precisely what they want but you cannot lie about your financial condition. You will need to present bank statements and tax returns that need to support your statements.

Your precarious position is that you need to demonstrate that you are now insolvent but at the time of your loan application you were not, or this could be considered mortgage fraud.

Are there tax implications with a Short Sale?

With a short sale the lender has money that was not covered in the sale. If that money was “written off” you can be sure that they will either seek a judgment against you or report the write-off to the IRS as 1099 income for the homeowner. Normally the amount of the 1099 will increase your yearly income and ultimately the amount of taxes due for that year. The judgment will appear on your credit for 10 years.

Conclusion

A short sale is not a cure all. If you’ve reached the point of foreclosure, contact your lender and ask for information on short sales. Put your request in writing. At this point a short sale will probably leave you better off than foreclosure and possible bankruptcy.

Very few lenders advertise themselves as a sub-prime lender. The definitive way to tell a subprime lender is with the rates that are charged. Do I need to say, if you can qualify for a prime rate loan, avoid subprime lenders.

A subprime borrower is one who would fail to qualify for a prime loan generally due to a low credit score. That score is normally referred to as a FICO Score. The score in the mid range could qualify a borrower for a loan but additional factors are taken into account. Those factors could include the down payment proposed, your amount of debt, and your ability to document your income.

Borrowers that are self-employed often cannot document their income and apply for stated income loans. A stated income loan is simply the income the borrower states on the application form. Because the income cannot be verified, the interest is higher than normal but the loan can still be given.

Subprime lenders use the same factors as prime lenders to determine an interest rate. Rates are higher with a low credit score and if the down payment is minimal. Still, keep in mind the rates and fees are higher at subprime lenders due to the higher risk and higher costs. Additionally, more subprime loans go into default then prime loans.

When Prime Borrowers Go Subprime

It amazes me when I see a prime borrower end up with a sub-prime loan. They have the credit score, the down payment and the documented income but they pay sub-prime prices.

The main reason for this is that prime borrowers are constantly being bombarded by subprime lenders on radio and TV with “Unbelievable Deals” to finance or re-finance a mortgage. They pitch the cash that you can clear on the deal or the lower interest rates that lower the monthly payment. They forget to mention in the advertisement that that teaser interest rate will expire and your house payment might double.

If you’re in the market to finance or re-finance a home, please check around before deciding on a loan. TV is great for mindless entertainment but use your mind when it connects to your wallet. Check with mainstream lenders to determine your eligibility for a prime loan.

In 2006, the Wall Street Journal reported a surprising fact that 61% of all borrowers that secured subprime loans had a credit score that would have qualified them for a prime loan. Need I say more?

Subprime exist to allow access to the market of no-credit or poor-credit borrowers. These are also the higher risk borrowers. You pay more, which is no big surprise. They lose more, also no big surprise. They have an endless supply of prospects, unfortunately, no big surprise.

If your first payment becomes 30 days delinquent and the next month’s payment looks doubtful, collection attempts begin in earnest. If your payments fall 90 days behind, the lender will likely refer your mortgage to an attorney or other entity that will initiate formal foreclosure proceedings.

With a foreclosure, the lender takes possession of the house, evicts the tenants, and puts the property up for sale.

A foreclosure on your credit record can be devastating and long lasting. It remains on your credit record for at least seven years. Avoid foreclosure if at all possible.

A way of avoiding a foreclosure is forbearance. Forbearance is a postponement of loan payments for a temporary period of time. This is normally done to give the borrower time to make up for overdue payments. This doesn’t mean the lender has forgiven the debt or any part of it. It simply allows a borrower to pay what is owed at a later date.

Most arrangements call for the borrower to make up the back payments and any fees plus interest over a period of time. When this amount is added to your existing monthly payment the result is often more than can be handled. But it is a better option than defaulting on your loan. A foreclosure can have negative effects on your credit score for years.

Lenders are required by law to work with you and attempt to approve your forbearance agreement request. It is extremely important that you are talking to the correct person within the lender’s organization that handles forbearances.

Additionally you must communicate everything in writing. Take notes on every phone call and confirm them back to the lender in writing. You have time to work this out. Follow through in a timely manner. Even if you get a date to appear in court don’t panic. You are able to get this date extended twice before your home would be sold at an auction.

Forbearance is a good option for a temporary problem. The effect of a successful forbearance on your credit record is minimal to moderate, depending on the circumstances.

If you’re already in foreclosure contact your lender and ask to be referred to the loss mitigation department. A forbearance agreement does not stop foreclosure but causes the lender to “postpone” or “continue” the foreclosure sale until the payments are completely caught up. A borrower MUST comply with the exact terms of the forbearance agreement or the foreclosure sale takes place immediately.

But instead it says things like:

We can save your credit!
We pay cash!
We buy your home and rent it back to you!
My company specializes in helping people just like you!
Don’t let the bank take your home; we’ll pay you for it!

Most advertisers with ads like these are bottom feeders. They try to
profit from your misfortune. If they really cared about you they would
help you for free or maybe charge you gas money. Now I’m not opposed to
capitalism or free enterprise but I am opposed to preying on people’s
misfortunes. Let’s look at some of the above examples:

We can save your credit (for a small fee).

Saving your credit is a questionable statement. In all likelihood your
credit is severely burned already. The real deal here is that you
actually pay them to take your house. They convince you that by selling
you will be spared the foreclosure and your credit will be spared a hit.

Some of that is possible true. If the house is not already in
foreclosure, you will be spared that hit but there is a bigger picture.
If you have equity (they won’t buy the house unless there is equity) you
lose, they win. They win ALL that equity and you paid them to steal from
you.

We’ll pay you cash (to sign over the house).

Same as #1 except that you get a little cash instead of paying them some
cash. Still, you are losing on the equity in the house. I watched an
elderly woman lose all the equity in her house for a few thousand dollars
up front. She was scared into thinking she would be a homeless bag lady.
With her equity she could have bought a small older house for cash.

We buy your home and rent it back to you!

What a deal! They buy your home for pennies on the dollar and you sign a
lease to give the monthly payment amount. Most of these guys buy your
home and get financing to cover the cost. The payments are then made by
you on your own house. Many times they will flip the house with a
guaranteed renter, you.

My company specializes in helping people just like you!

It should read “My company specializes in helping separate people just
like you from their money!” That’s what they do and they do it well.

My best advice is the same advice I give to senior citizens all the time.
Don’t trust anyone that contacts you first. Only consider trust if you
initiated the contact. That includes the mail, the phone, email and
doorknockers. Ask yourself, why me and how did they find me? Bottom
feeder!

Don’t let the bank take your home; we will sell it or we’ll pay
you for it!

This one is unbelievable. These are usually unethical real estate agents.

They have you sign a contract listing the house for a set period of time
and after which the agent can buy your house at a discounted price. They
never really try and sell the house and then they will convince you that
the lack of buyer interest shows the house won’t sell for the asking
price. Your only option is to take their discounted price.

Rest assured, they already have a buyer and will flip the house as soon
as the U-haul pulls away. Always use a local real estate agent and
preferably someone that a friend or neighbor has used before.

Remember that YOU are the only person that has YOUR best interests at
heart. Think! Be cautious! Take your time and do your research!

This is a very common question. The process of giving a home back to the bank is called a “Deed in Lieu of Foreclosure.” As good as it sounds, not all banks will take a house back when it is offered

If you have equity in your house, you would fare better by listing the property and going for a quick sale. In many parts of the country, houses are offered thousands of dollars below market and they still have no takers. Consequently, a quick sale might not be so quick.

A California couple put their house up for sale at $100,000 below appraisal and has since lowered it 3 times to $200,000 below appraisal. After six months they are still waiting for their first offer on the property.

Before you pack that U-haul late at night and disappear you might want to consider looking into a deed in lieu of foreclosure. A lender will rarely be interested in taking a property back if more is owed than what the property is worth.

Any settlement agreement entered into must have a total consideration equal to or exceeding the fair market value of the property being returned to the lender. Most lenders will not proceed with the deed in lieu of foreclosure process if more is owed on the property than the fair market value of the property.

A borrower will benefit slightly from a “Deed in Lieu” on a credit report. The loan’s status will be closed but it will reflect that a “Deed in Lieu” was applied for. The reality is that this is slightly better than a credit report showing a full “Foreclosure.”

A distinctive plus in the process is that the foreclosure process will end sooner than if the entire foreclosure process had played out. Your credit report will show less late payments. That in itself will make it easier to rebound from the loss of your home.

If a foreclosure is inevitable, offering it back to the bank is a good idea. You will lose the house sooner or later anyway. Make the personal damage less and allow the rebuilding process a break that will allow you a near normal life sooner.

Advantages of a Deed in Lieu of Foreclosure

1) You are immediately released from most and sometimes all of the indebtedness associated with the defaulted loan.
2) You avoid the embarrassment of newspaper postings, the sheriff tacking a legal notice to your door, a court appearance and a formal sheriff eviction.

Giving the home back to the bank will not save your home, but it will help your future. And the process is less harmful to your credit report than an actual foreclosure.

The Down Side of a Good Deal

Giving the house back to the bank is a good answer to a bad problem but it does have a down side: 1099C, Cancellation of Debt.

If you borrow money from a commercial lender for the purchase of a home and later give the home back to that lender, the lender might later cancel or forgive that debt. Under that circumstance, you may have to include the canceled amount as income for tax purposes.

When you borrowed the money you were not required to include the loan proceeds as income on your tax return because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you originally received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Cancellation of Debt income is not always taxable.

There are some exceptions. Debts discharged through bankruptcy are not considered taxable income. Additionally, if you lose money from the sale or foreclosure of personal property you cannot deduct that loss.