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5 Alternatives to Foreclosure

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ForeclosureFor many homeowners, foreclosure is still a very real threat. When you have a financial setback, it can be difficult to keep up with your mortgage payments.

If you want to avoid foreclosure on your home, here are 5 alternatives:

1. Mortgage Modification

If you have started missing payments, you might be eligible for a Home Affordable Modification. A mortgage modification is an agreement between you and the lender to change the terms of your loan so that it is more affordable. A mortgage modification can help you avoid foreclosure, and you might even be able to to stay in your home.

(For those who aren’t in danger of foreclosure, and haven’t missed payments, but who are having trouble refinancing, HARP might be able to help with that. I’m going through a refinance through HARP right now.)

2. Short Sale

For those who know they will need to leave their home, a short sale can be an answer to the foreclosure problem. A short sale will put a big ding on your credit profile, but it might not provide as big an impact on your credit score as walking away from your mortgage altogether.

A short sale allows you to sell your home for less than you owe. This is an attractive option for those who need to sell, but whose homes have dropped in value since the financial crisis. In many cases, your home has to be on the market for at least 90 days in order for the bank to even consider it.

Be aware, though, that not all short sales result in forgiveness for the remainder of what you owe. You might still need to make payments on the remaining amount of the mortgage. But at least you are able to sell the home and you don’t have to go through a foreclosure.

3. Forbearance

In some cases, you can arrange to pay a smaller portion of your mortgage for a set period of time. You might even be able to avoid making payments altogether when you work out a forbearance plan. This is a temporary solution, and your mortgage lender might add your missed payments to the end of your mortgage, lengthening your term. In other cases, you might have to make bigger payments to catch up to your missed payments.

If you know you are going to have problems, it’s a good idea to talk to your mortgage lender as quickly as possible, and see if you can work something out.

4. Deed-in-Lieu of Foreclosure

“If an individual knows they cannot make their payments, and that default is inevitable, they can contact their bank, present their hardship, and attempt to negotiate a deed-in-lieu of foreclosure,” John Michael Grafft says.

Grafft is a Director of Leasing Services at Prudential Rubloff, and he says that it’s possible to avoid credit problems if you are quick with this option. “If you negotiate a deed-in-lieu before you ever miss a payment, you will not have negative marks on your credit.”

This option means that you might have to leave the home, though, since you are turning the deed back over to the bank. Some lenders are willing to agree, since it means they don’t have to go through foreclosure proceedings.

Even if you have credit issues, the waiting period for getting a new mortgage after a deed-in-lieu of foreclosure is shorter than what is required after a foreclosure.

5. American Equity Foundation

Another option is to work with the non-profit American Equity Foundation. Steve Ely, the CEO of eCredable, says that this organization specializes in helping homeowners who are underwater avoid foreclosure. “AEF purchases the mortgage from the existing note holder at a discount,” he explains. “The value prop to the note holder is they won’t have to take the consumer all the way through foreclosure and deal with that awful mess.”

The consumer gets to stay in the home, and they make payments on a new note to AEF. “After the consumer appears to be stable, AEF puts them in a new mortgage based on current market evaluation of the house, and everybody wins,” Ely continues.

Bottom Line

If you know that you are going to run into problems with your mortgage, it’s a good idea to contact your lender to see what your options are. If you are proactive, you might be able to avoid foreclosure — and even stay in your home.

(Photo: taberandrew)

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