In the first in the foreclosure series, I reviewed the foreclosure process in Texas.  Ideally, a homeowner will never have to go through that whole process.  However, that is simply not the case.  Most folks who miss a mortgage payment are never able to catch up because missing even one payment indicates a major change to the financial situation of the owner.  It is vitally important to start looking at options once the first payment is missed so that, if needed, action can be taken quickly to avoid foreclosure.  Here are some of the available options:

Short Sale:  One of the most common alternatives is the short sale.  While this will be its own post in the foreclosure series, I'll briefly comment now.  A short sale occurs when a lender agrees to accept less than the balance of the loan as repayment.  It is called a short sale because the lender accepts a 'short' on the amount owed (it is simply an ironic twist that the time it takes to do this can be lengthy).  As you would expect, there are many requirements for a short sale.  In brief, the property must have a market value lower than the loan balance and the owner must have some sort of financial hardship that prohibits them from making the monthly payment.  The costs associated with closing are paid by the lender.  Again, I'll have a more indepth look at short sales soon.

Reinstatement:  While this is transactionally the easiest alternative, it is usually the hardest to pull off.  In a reinstatement, the owner pays the lender what is owed in back payments, fees, etc.  This can be done up until through the very late stages of the foreclosure process.

Forebearance (Repayment Plan):  The lender and homeowner agree to a payment plan which allows the owner to repay the missed payments (and associated fees) over time.  Because this payment is added to the regular mortgage payment for a set period of time, the homeowner must have corrected the financial situation that caused them to miss the payments in the first place. 

Mortgage Modification:  In a mortgage modification, the interest rate, loan balance, loan term, or a combination of any of these is adjusted to result in a permanently lower mortgage payment.  This alternative has gotten a lot of attention, but it is still fairly rare.  The reality is that many folks who are facing foreclosure today are experiencing such a major financial change that a reduction of a few hundred dollars will still not allow them to make their payments.

 

Rent the Property:  If a homeowner can rent their property for enough to cover the mortgage, this can be an option.  However, most folks facing foreclosure have loan payments above potential rental income.

 

Deed in Lieu of Foreclosure (Friendly Foreclosure):  In this alternative, the homeowner simply turns over the property to the lender to avoid foreclosure.  While this may reduce the hassle, the entries on credit reports are generally the same as a full-blown foreclosure.  Also, banks are not as agreeable to this as you might think.

 

Bankruptcy:  While many of the attorneys advertising on late-night TV think this is the best option, the reality is that it generally only delays a foreclosure.  Again, it goes back to what I've already noted in that the homeowner usually has had a major financial change that has resulted in the inability to make mortgage payments.  By eliminating non-mortgage debts, it may reduce some monthly bills, but often the mortgage is still the biggest monthly expense.  Of course, bankruptcy is also very damaging to credit scores. 

 

Refinance:  Another unlikely scenario.  In order to qualify to refinance, you'll need good credit and a decent amount of equity in the house - usually things that are lacking when you are facing foreclosure.  Also, your original interest rate would have to be quite a bit higher to make a big difference.

 

Servicemembers Civil Relief Act (for Military Personnel Only):  Though a small pool of qualified applicants, this is a wonderful tool for active military who debt was entered into before deployment.  For those who meet the standards, mortgage and other consumer debt can be reduced.  I don't know the specifics of this plan, but the American Bar Association has attorneys to assist homeowners with this.

 

Sell the Property:  For homeowners with enough equity, this is an ideal solution.  The sale needs to be closed before the foreclosure sale.  Unfortunately, most folks facing foreclosure don't have enough equity these days. 

 

If you know someone who has missed a mortgage payment, please contact me soon as there isn't much time to get one of these alternatives set in motion.