You may not want your bank to know that you’re facing financial difficulties. It’s the kind of conversation that we all would prefer to avoid. But that is the first thing you should do when you realize there is potential trouble with your mortgage payments ahead.
Believe it or not, your bank does not want to foreclose on your house. So it may be able to offer some solutions for you. But the bank can only be so flexible. It is, after all, a business and it has its own financial interests to look after. Working with or without the bank, there are several alternatives to foreclosure available to you in California. Let’s look at the pros and cons of your options, including staying in control of your finances by selling your house.
California Homeowners Have Alternatives to Foreclosure
Your stress is high when you are having trouble paying the mortgage. It probably isn’t your only pressing financial issue and the future might look pretty grim. You might feel even more despaired if you have reached out to some organizations that help homeowners facing foreclosure, like the Save Your Home California program, only to discover that it has reached the end of its funding and is no longer able to help.
What else can you do if your house is being foreclosed on in California? Your first move should be putting a call into the mortgage holder. Here are some of the options that they may have for you:
What are the alternatives to foreclosure for California homeowners?
When you hit a financial glitch, forbearance can temporarily reduce or suspend your mortgage payments. This can get you back on track if you have experienced a family emergency, unemployment, a dry spell in your business, or some other situation that disrupts your cash flow for the short-term. When a little breathing space is all you need to get your finances back on track, asking the bank for forbearance is less damaging to your credit score than a series of late payments or foreclosure.
However, it can sometimes be difficult to qualify for forbearance and, even if you do, it can drive you deeper into debt. If you don’t have a stellar history of making payments on time and a solid employment record, the bank will be less likely to grant you this option. Also, if you are dealing with a loan servicer that doesn’t actually own the loan, they won’t want to let you have a forbearance because there’s no risk to them in foreclosing. Keep in mind, too, that a forbearance increases your overall debt. Since your interest payments are charged on the amount you owe, stretching out the mortgage timeline, which is what forbearance does, will increase your interest payments. So, consider this option carefully before you ask for it.
If the short break provided by a forbearance is not enough to give you some financial relief, negotiating permanent new loan terms might. With a loan modification, your monthly payments can be reduced by extending the term of the loan, from 20 to 25 years, for example. Sometimes the interest rate or loan principal may also be permanently reduced. On loans guaranteed by Fannie Mae or Freddie Mac, you can apply for the Federal Housing Finance Agency’s Principal Reduction Modification program. This program permanently reduces your overall mortgage debt and has been designed to ensure that foreclosure is avoided.
But even if you are not approved for new loan terms, simply applying can have negative consequences. You may end up enrolled in a trial loan modification program. That lowers your payments while you go through the lengthy application and approval process, which may be as complicated as applying for the loan in the first place. If your application is rejected, the money that was reduced from your payments during the trial period becomes immediately due in a lump sum. The bank may even start foreclosure as soon as possible. Rather than agreeing to a loan modification if they are not ultimately convinced of your ability to pay.
Receiving a loan modification may save your house, but it will come with burdens of its own. If you are approved and your term is extended but no principal is forgiven, you will end up paying more in the end since, like forbearance, the longer-term adds to the interest due. Also, the money you save by modifying the loan may be taxed as income. If you get a loan modification before you miss any payments, the impact on your credit score can be minimal or none, but this depends on how your bank reports the modification to the credit reporting services, so it is risky in any case. All in all, loan modification is a stressful process that can easily backfire.
Deed-in-lieu of Foreclosure
A deed-in-lieu is the transfer of your house to the bank’s ownership to avoid foreclosure. If the agreement is formulated right, you will not be liable for any remaining debt. Even if the house is valued at less than the balance of the mortgage. Also, a deed-in-lieu transfer will save you thousands of dollars in fees and penalties. That can get tacked on to your debt by the time your house reaches foreclosure. Also, even though you lose your house, this resolution keeps the proceedings out of the public eye.
Sounds reasonably good in times like these, right? Be aware, however, that a deed-in-lieu is generally considered a last-ditch option, and banks differ in their attitudes toward it. Don’t be surprised if you encounter some degree of resistance if you apply to do this. If you are set on asking the bank for this option, you’ll need to hire a lawyer to navigate the complex transaction. And, even if the bank agrees, they may still ask for a cash payment along with the deed-in-lieu. Also, there will be a negative impact on your credit score just as with a foreclosure.
Sell Your House
Selling your house is a great alternative to having it foreclosed on. When you see financial troubles coming, you can sell your house. Even before any real issues with the mortgage payments come up. If you are already experiencing the foreclosure process, your timeline is still flexible since you can sell your house right up to a few days of the auction sale. Selling can save you time, money, inconvenience, and damage to your credit. You have two options for selling your house depending on how far along the foreclosure is.
Selling on the traditional market.
If you have time to spare before the bank forecloses, you can hire a real estate agent. And sell your house just like any other house on the market. If the sale price will cover your mortgage debt, you won’t even need the bank’s approval. And the bank will be happy to avoid foreclosing on you. Besides avoiding stress and loss, you retain control over your situation by acting early.
Not only will your credit score be saved, but it will also be much easier to find new housing. This option has some potential drawbacks though. Your house will have to be in marketable shape to get the best price, and renovations are expensive. Also, staging and showing can be inconvenient. And, don’t forget that you will have to pay about 6% of your house’s sale price to an agent. Because California’s real estate commission rates are some of the highest in the nation. Worst of all, there is no guarantee of a sale—it may not happen. Or it may take too long for you to avoid the foreclosure proceeding.
A short sale is when you sell your house for less than the amount you owe on your mortgage. And it is an option once you are officially in default. Banks agree to let you sell short sometimes because they are as eager as you to avoid a foreclosure. Simply put, foreclosures are expensive for them. Even though you will walk away with no equity. This foreclosure alternative can be beneficial to you too. For instance, if your mortgage is nonjudicial, as most California mortgages are, you cannot be held liable for the balance of your mortgage debt after the sale.
Besides that savings, you will also save a considerable amount of money that would go to fees and penalties in a foreclosure. Avoiding foreclosure by selling short, however, is not a simple process. The bank may expect you to find a potential buyer before it even approves your application. If the bank does not make you find a buyer in advance, it will still have to approve the deal before it can go through. This can make the sale much harder. As most buyers see buying a house in foreclosure as a risky and unappealing prospect. Who wants to spend all the time and energy getting financing while knowing that they may not be allowed to buy the house in the end? It’s a lot to ask of a buyer, and you might not find one who is willing to do that.
Avoid Foreclosure By Selling Fast
Selling your house fast as an alternative to foreclosure doesn’t have to be difficult when you already have an experienced buyer on the line. Osborne Homes has been buying California houses that are in danger of foreclosure since 2009. We are a locally-owned real estate investment company who understands the foreclosure process and knows how stressful it is for you. That’s why we act fast—often giving you a cash offer within 48 hours. because we can do this, unlike typical homebuyers. We don’t have to wait for bank financing. We have money in hand to buy your house. If you are underwater and your property is worth less than the mortgage. We can help you work with your bank on a short sale.