The Ten Alternatives to Foreclosure

Foreclosure Is Not Your Only Option

When the bill collectors start calling, most people quickly begin to feel like they have run out of options. Even though it might feel like you do not have any alternatives, you always do. We have compiled ten options available to you. It is up to you whether to consider these, but knowing you have options is critical to resolving your situation.

When beset by bill collectors, our instinct is not to answer the phone, not to look at or read our mail, and try to ignore the situation, praying it will somehow go away. This is the worst thing you can do. Trying to ignore the problem only means that other people will make decisions that will impact your life for up a decade. Do you really want someone who does not know you or care the least bit about you making decisions that will affect you and your family for the next ten years? I surely hope not.

The key to your current situation is understanding what your alternatives are, and then making the best decision for you and your family. Do not let the situation paralyze you, or pretend it will go away or resolve itself. In the end, it will resolve itself, but generally not the best way for you. Learn what your options are, understand them, make a decision, and then move ahead with that option. Take action. Make that phone call, contact whomever you need to talk to, and get moving now to rectify this situation. The faster you act the more and better alternatives you will have available to you.

Most of these options will negatively impact your credit, some for as long as seven to ten years. Your credit score is referred to in the industry as the FICO (Fair Isaac Company) score. Credit reporting agencies use different criteria and/or scoring methods for various transactions, therefore, no hard and fast rules govern how much each will affect your credit score. Bear in mind, however, your credit score is what most lenders and employers use when gauging your creditworthiness and reliability.

You probably are aware that having negative items on your credit report might cause lenders to deny you access to loans and/or credit card accounts. Negative credit reports might also adversely affect your ability to land your next job. Many employers consider bankruptcy as evidence that you are not responsible with your money and, therefore, they are hesitant to trust you with their business. This might not seem like a big deal if you have a job, but having this on your credit report dramatically decreases your chance of getting that next job if you are laid off or if your current job disappears within the next decade.

If you are behind on your mortgage payment and lack the money to catch up and facing foreclosure of your house, following are some options – as well as their pros (positives) and cons (negatives) – available to you.

OPTION 1 – Bankruptcy

  • Consider this option only in the direst situations and after seeking counsel from a qualified legal bankruptcy professional.
  • If you choose this option, be sure to allow your attorney time prior to the auction date of the property to collect information from you and file court documents to stop foreclosure proceedings.

Pros

Bankruptcy generates a temporary hold on the foreclosure process as soon as court papers are filed.

Cons

  • Filings are available to the public, which can cause embarrassment for you or your family.
  • Bankruptcy filing does not necessarily stop the foreclosure process permanently because the lender might restart the foreclosure.
  • Can reduce your credit score by as much as 200–300 points, and remain on your credit report for 7–10 years.
  • Can prevent you from obtaining a new mortgage for up to seven years.
  • Might cost you a job, if a potential employer sees this on your record.

OPTION 2 – Sell your house to a friend or family member

If you have a friend or family member who is willing to purchase your house, this is one of the best options available.

Pros

  • You can rent or lease the house back, providing the transaction was not a short sale.
  • You will not have to move out of the house or uproot your family.

Cons

  • Discussing your financial challenges with your friends and/or family can be uncomfortable.
  • You could lose whatever equity you have in your house by selling under less-than-ideal circumstances.

OPTION 3 – Sell your house to an investor

If you find a real estate investor who is willing to purchase your house, this is another of the best options available.

Pros

  • You can rent or lease back the house, if the transaction was not a short sale.
  • You will not have to move out of the house or uproot your family.

Cons

  • You could lose whatever equity you have in your house by selling under less-than-ideal circumstances.
  • Locating a willing investor is difficult because most prefer to purchase property then sell it quickly at a profit.
  • Potential investors might be wary of selling back to you because of your inability or unwillingness to pay your current lender, which could affect a potential investor’s decision.

OPTION 4 – Sell your house on the open market

If you have time to sell your house, this is one of your best options.

Pros

  • If your property is worth more than you owe on the mortgage, you might be able to sell it quickly enough to pay off your mortgage before you lose your property and your equity, and receive some cash when you close the sale.

Cons

  • Selling your house can be challenging in this market with many homes for sale and few buyers able to qualify for a mortgage.
  • If you are several months behind on mortgage payments, you might lack the time required – up to six months – for a realtor to secure a contract and close the sale.
  • The cost of repairs and/or cosmetic touch-ups needed to place your home on the market might be more than you can afford in your current situation.
  • You will need to move out of your house and secure another place for you and your family to live.

OPTION 5 – Refinance your mortgage

If you can find a lender who will refinance your current mortgage, and you can afford the new loan payments, this is another good option to pursue.

Pros

Refinancing your mortgage allows you to keep your house and restore your credit by making timely payments on your new mortgage loan.

Cons

If you cannot make your mortgage payments now and are already several months behind, it might be challenging to find a lender willing to refinance your current mortgage.

OPTION 6 – Loan modification

  • This is another good option.
  • Owner Finance Homes recommends working with your current lender to determine if they would be willing to work with you on a loan modification or another arrangement that would allow you to keep your house and avoid foreclosure.
  • To discuss your options for loan modification, contact the loss mitigation department and ask to speak to a loss mitigation specialist.

Pros

  • A loan modification allows you to continue to pay your current lender and stay in your house.
  • Loan modification possibilities include: reducing payments; waiving some payments; paying only the interest for a determined time; setting up short-term repayment plans to help you make up the deficit; taking the payments you are currently behind on and adding them to the unpaid principal balance on the back end of your mortgage.

Cons

  • Most lenders have stringent requirements before approving a loan modification.
  • Requirements can include: income level; length of time in current employment; minimal delinquency time in current mortgage.
  • Most people in a delinquency situation who do not feel they will be able to catch up will not qualify for a loan modification.
  • Loan modifications are noted on your credit report and can negatively affect your chances of getting a new loan, credit card, or job.

OPTION 7 – Forbearance

This option is only a short-term solution.

Pros

  • You make lower payments for a short time while you work to improve your financial situation.
  • You keep your house, and your current mortgage agreement remains intact.

Cons

  • You can end up back in the same situation within months after the forbearance agreement ends.
  • Most lenders are not offering forbearance agreements to severely delinquent homeowners.
  • Forbearance does not solve longer-term issues for those with extended financial challenges.

OPTION 8 – Deed in lieu of foreclosure

This option is preferable to foreclosure.

Pros

  • In exchange for the deed, title, or ownership of your property, the lender and the mortgage company agree to release you from your obligation.
  • You avoid having a foreclosure on your credit report.

Cons

  • A deed in lieu of foreclosure can reduce your credit score by as much as 200–300 points, and remain on your credit report for 7–10 years.
  • Can prevent you from obtaining a mortgage for up to seven years.
  • Can negatively affect your chances of getting a new loan, credit card, or job.
  • You will lose your house and will need to secure another place for you and your family to live.

OPTION 9 – Sell your house to an investor using a short sale

This option is preferable to foreclosure, and could be the only one available to you.

Pros

  • The lender agrees to release their lien on the property for less than the mortgage amount.
  • The investor can negotiate with the lender to report the short sale to credit reporting agencies in a way that minimizes the negative impact on your credit report.

Cons

  • A short sale can reduce your credit score by as much as 100–200 points, and remain on your credit report for up to seven years.
  • Can negatively affect your chances of getting a new loan, credit card, or job.
  • Can prevent you from obtaining a mortgage for up to two years.
  • Your lender might request that you pay the “short” portion of the loan.
  • The IRS could require you to pay taxes on the “forgiven debt” portion.

OPTION 10 – Sell your house to an investor willing to take over your payments

  • This is a good option if your property is worth more than your outstanding mortgage balance.
  • You go through a formal closing and sign the deed, title, or ownership over to the investor, who signs a promissory note to pay you in the amount of your current mortgage payment.
  • You hold a lien on the title against this promissory note.

Pros

  • The investor makes all your back payments, gets you caught up on what you owe on the house, and makes all your payments going forward.
  • Allows you to avoid the negative impact of a foreclosure, a deed in lieu of foreclosure, or a short sale.
  • Your credit score improves as the investor catches up your back payments and makes regular payments to your lender.
  • If the investor does not make all the payments required in your agreement, you can repossess the property.
  • If you repossess the property, you benefit from any repairs and/or improvements the investor made.

Cons

  • You can do this only if the house is worth more than your outstanding mortgage balance.
  • You lose whatever equity you have in your property because you sell it to the investor only for the outstanding mortgage balance.

Once again, prior to choosing an option, we urge you to speak with a qualified professional who can help you understand and choose the one that is best for you and your family.