Thursday, July 28, 2011

How to avoid foreclosure

A lot of clients ask me what to do to stop a foreclosure on their home. There are several options that may be available: deed in lieu of foreclosure, modification of the loan, or short sale. Here is the difference.

Usually, a deed in lieu of foreclosure can only be done when there is only one mortgage on your home. If you have a second mortgage, equity line, or judgment or tax lien, it is usually not possible to do a deed in lieu. How this works is the mortgage company takes back the house instead of foreclosing on the house. They wipe out any deficiency between the value of the house and the amount owed on the loan. The bank keeps the house, and the homeowner can walk away with no debt owed to them.

A short sale means the homeowner puts the house on the market for sale and sells it. It is more difficult to do a short sale when you have more than one loan because all the lien holders have to agree to do the short sale and how to divide up the money received. You need to receive permission from the bank to do a short sale. Most of them require a “hardship letter” to qualify which means you need to explain why you hare having a hard time and the bank gets to decide if your reason qualifies. The most commonly accepted reasons are medical expenses, job lay offs, and divorce but the bank considers many problems as hardships. They appraise the house to get an idea of how much to sell it for. The house is sold for less than is owed on the mortgage (you sell it “short” of your loan amount). The bank forgives the difference.

Another option is refinancing. Many homeowners cannot refinance because their house is upside down or underwater (you owe more on it than it is worth). Sometimes the bank will cooperate any way but, again, if you have more than one mortgage this is probably not an option for you unless you can refinance the amount you owe to both. There are some federal programs around to assist homeowners but they have very particular qualifications and you have to make every payment on time if they decide to give you a chance. Most consider these programs to be failures, but some people have successfully refinanced with them. Some of those programs are:

Homeowner Affordability and Stability Plan (HASP) also known as the Making Home Affordable Plan (MHAP)

Home Affordable Modification Program (HAMP)

Home Affordable Refinance Program (HARP)

Hope for Homeowners (H4H)

A new program to help with second mortgages (second lien, home equity loans) has just started too.
Home Equity Loan Modification (HELM)

Here is a good website for more information on the federal programs available

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