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Techniques to Avoid Foreclosure On Your House

By Erik Folgate

You’ve seen all of the articles and news segments about the skyrocketing percentage of homes going into foreclosure around the country. It’s not hard to figure out why the foreclosure rate has risen so drastically. Mortgage lenders took advantage of buyers, and buyers threw away all logic and reasoning when figuring out how much house they could afford. However, looking back at the past will not get us anywhere. The damage is done and now this country needs to clean up the housing market mess. Ask someone who has gone through a foreclosure how much fun it was. They will most likely tell you that it was an extremely emotionally draining time period in their life. Losing your home is a nightmare come true. However, there are ways to avoid the full foreclosure process. Here are two options to consider if you’ve found yourself in a position where you can’t pay your mortgage payment.

Short Sale: Working out a deal with your mortgage company to do a short sale on your home is the best option when faced with the dilemma of not being able to afford your house payment. Basically, a short sale is when the mortgage company agrees to accept a lesser payoff amount than the current amount owed on the mortgage. Let’s say your house is worth $100,000. You put it on the market for $105,000 to cover the agent’s commission and closing costs. If the market is cold enough, you won’t get very many bites at that price. But, if you reduced the price to $90,000, you would attract much more attention from potential buyers. A way to avoid coughing up the extra $10k would be to request that the mortgage company accept a short sale meaning that they will accept $90K as a payoff without going after you for the remaining difference. The problem is getting the mortgage company to agree to this. They don’t have to agree to anything other than the original agreement you signed at the closing. The moral of the story is that some mortgage companies will do it and some will not do it. They will be more willing to do it if you are already way behind on the payment and you don’t have ANY cash assets. If you’ve got $10k sitting in the bank, why should they agree to letting you get away with paying back $90k when you owe $100k? Catch what I am saying? Remember, foreclosure is not fun for you and for the lender. It is very costly for them to foreclose on your house, so if your short sale offer is fairly reasonable, they might go for it.

A short sale is your best option to avoid foreclosure for two reasons.

  1. A short sale will affect your credit less negatively than a foreclosure or deed-in-lieu of foreclosure, which I will discuss next. You’ll probably lose about 80 to 100 points on your credit score, because it will show up more as a pre-foreclosure sale.
  2. The time period for waiting to buy another house is only 18 to 24 months before a lender will start quoting you reasonable interest rates to buy another house.

Deed-In-Lieu of Foreclosure: A deed-in-lieu of foreclosure is another option for letting go of your house without going through the formal foreclosure process. A deed-in-lieu is a written agreement between you and the mortgage company that you will hand over the property and walk away from it without going through the formal foreclosure proceedings. The key is that you want the deed-in-lieu agreement to read, “WITHOUT RECOURSE”. This means that when the mortgage company seizes the property and resells it, they cannot come back and sue you for the remaining amount of the mortgage if they sell it for less than you owed on it. The mortgage company is going to resell the house at a discount, so you need to make sure you have those two words in the agreement if you set this up.

A deed-in-lieu of foreclosure is beneficial to you, because it allows you to walk away with a clean slate without all of the hassle of a foreclosure and less emotional stress. It is beneficial to the lender because they will not have to spend all of the money that it costs to foreclose on property.

How a deed-in-lieu of foreclosure affects your credit:

  1. The bad news is that it will affect your credit the same way a traditional foreclosure will affect it. You’ll lose anywhere from 250 to 280 points on your credit score.
  2. You’ll need to wait at least 36 months before you can start thinking about buying another house. The interest rate won’t be reasonable until at least 3 years following the deed-in-lieu agreement. Make sure you pay your rent ON time for three years and keep record of it!

Foreclosing on a house is not the way to go if you have other options. You need to make sure that you don’t take the foreclosure too hard. Realize the mistake you made and move on. You can learn a valuable lesson from struggling to make a house payment. Don’t buy a house until you have a large cash reserve and the monthly income to justify the payment. Your payment should not exceed 25% to 30% of your monthly income. If it’s between 30% to 50%, you’ll be able to swing the payment, but you’ll never gain any traction to save for large purchases and retirement. If you’re payment is more than 50% of your monthly income, you’ll most likely find yourself in a foreclosure situation at some point. The point is that buying a house is not as easy as some people make it sound. Be patient and do it right. You’ll enjoy the home so much more when you can actually afford to pay for it AND maintain it.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • http://www.bustachange.com Jerad Kaliher

    It’s a shame that so many people don’t have the sense to actually purchase a home within their budgets. I think that in this whole subprime lending meltdown phase people have been highlighting subjects that steer away from having to foreclose or how to switch to a fixed rate loan.

    In the long run it stems from poor money management skills. It almost makes you wonder if the public school system should begin teaching children at a young age so that we don’t keep making the mistakes that the last few generations have made. It’s sad to see people today in their 50′s working at Wal-Mart because they Baby Boomed their way out of planning for retirement.

  • Eric

    I don’t get how companies can reject a short-sell, then foreclose, and sell the house for less than the short-sell offer. I understand they want to protect the business or feel they can sell it for more, but still, it seems like bad business not to take a legit short-sell offer.

  • SavingDiva

    None of the choices are particularly great, but I guess that’s part of the point…It’s more of a choose the least awful…

  • Connie

    Thanks for the information on “without recourse”. I had been looking for the language to use in our letter to our mortgage company.

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