Alternatives to foreclosure
Foreclosure is a horrible thing. It happens due to either a mistake where a home buyer buys a property larger than what he can afford, or due to financial problems like losing income. After the borrower can’t make his payments, the lender asks the court to auction the house to repay the loan. It is a process by which lenders try to recover their losses by auctioning the home and is done differently in different states. That does not mean that foreclosure is an entire remedy to the lender, actually the lender can sue the borrower if they didn’t cover their loss from the money made in the auction, and at that case the borrower will sometimes end up by filing bankruptcy since he/she usually won’t have enough to pay.
Usually, and in my experience homes that go in foreclosure auctions will sell around 75%-85% of their value. Although this is not a rule, and in hot markets foreclosures can sell even higher, yet in a slumping market this is my average expectation. If the home is 100% financed usually the loan is broken into two loans, one at 80% of the value, and the second is at 20% of the value. Those two loans sometimes are with different banks. The way those loans gets recorded is by giving a higher lien priority to the 80% loan, and a lower lien priority to the 20% loan. This means that in a foreclosure, the judge will repay first the 80% loan, and use any remaining funds to pay the 20% loan. And so, the 20% loan will get a lower priority.
Lenders understand that in case of foreclosure the smaller loan will usually swallow a big part if not all the loss, and so the 20% loan will have higher interest rate compared to the 80% one due to higher risks. — So how can this information help you?
Short Sales:
If foreclosure signs are showing on your finances, things are getting tougher then contact your 20% loan bank. Those are the ones that will take the biggest loss if you go into foreclosure. Ask them either to restructure your 20% loan in a more helpful manner, or to help you sell your home in a “short sale”. A short sale is a process by which the bank agrees to sell the house at a lesser price than it’s anticipated market value without asking for the difference between what you owe and what the home sold for. Banks will do that to avoid a bigger loss if the house goes into foreclosure. If they agree to help, then that’s one way out. You might also talk to the 80% bank, but remember they are least likely to get a loss.
Deed in lieu of Foreclosure:
That’s another way out. If you have your home in one 100% loan or your banks don’t want to help in a short sale try asking for a deed in lieu of foreclosure. This is a instrument by which the bank takes ownership of the home and in return will not start foreclosure proceedings against you. Every bank has their own forms and not every bank will agree to this. But again, its another route to investigate.
Always remember that although those two ways are alternatives to foreclosure that you should discuss with your bank, yet they will not save your credit. However, in my opinion they will lead to lesser damage, and may be better options. Also remember that in tough financial times the best way is to communicate with the lender. Don’t delay it, and good things will not come if you wait.
Technorati Tags: foreclosure, alternatives, short, sale, deed, lieu, short sale, deed in lieu of foreclosureTags: alternatives, deed, deed in lieu of foreclosure, foreclosure, lieu, sale, short, short sale
February 12th, 2008 at 9:19 am
[...] Such slow down is beneficial in case the homeowner was able to communicate with the bank and arrange an alternative solution, or figure out a way out of foreclosure and repay the [...]