Whether you are new to pre-foreclosure real estate investing or are a seasoned pro, knowing all the ways to slow and stop the foreclosure process in your area, for your clients, is critical. Each property and each situation is unique, so the more options you can offer your customer, the better.
Some foreclosure avoidance options are available everywhere, others are only available under certain circumstances. Different states have different laws regarding foreclosure. Judicial states and non-judicial foreclosure states have very different time lines.
Besides each state having different ways of handling the foreclosure of property, each lender, investor behind the note or mortgage, private mortgage insurance company, and county or municipality may have their own way of doing things that must be adhered to.
The main ways to stall or stop a foreclosure are as follows:
- Re-instatement
- Refinance
- Forebearance
- Loan Modification
- HAFA
- List With Realtor & Sell Home
- Sell Home FSB0 (For Sale By Owner)
- Short Sale
- HAMP
- Forensic Loan Audit
- Produce the Note
- Bankruptcy
Refinance-This option involves the distressed property owner going out and securing a new loan for the property in order to pay off their existing delinquent loan. The problem is, they are already behind or delinquent on their present loan. No lender is going to lend them the money or write them a new mortgage unless there is a substantial amount of equity in the property. Some homeowners do have good credit and are able to secure alternate financing before they get behind on payments. In times of declining property values, like most people find themselves in today, it is virtually impossible to refinance for the amount owned.
Forebearance-This option is available to most borrowers. It is when the lender agrees to allow the home owner to make up the entire amount they are behind, by splitting the amount delinquent over a short period of time (usually 6 months to 2 years). They then divide the entire delinquent amount by the payback period and add the amount to the regular monthly mortgage payment amount. So, if someone's regular payment was 2000 and they were 12000 behind, with a 6 month payback period, they would be expected to make 4000 per month payments for the next 6 months. Most of these plans fail. If the borrower was having trouble making a 2000 per month payment, how can a lender reasonably expect them to be able to make a 4000 per month payment.
Loan Modification-Most lenders have the ability to modify the terms of a borrowers original note or loan. There are many creative and flexible ways of dealing with such modifications. Some lenders will reduce the interest rate, extend the amount of time to pay back the loan (to as many as 40-50 years), and on rare occasions, reduce the amount of principle that the loan is based on. Each lender and investor has a unique process for determining which loans they will modify and how they will modify it.
HAFA-Making Home Affordable Government Loan Modification Program-These programs have been an immense failure. They have taken the amount of time required for lenders to process a loan modification to an average of 470 days. The program has no enforcement provisions, rendering it a bureacratic/paperwork/labor intensive waste of time, energy and resources.
List With Realtor & Sell Home-Borrowers who have equity in their homes or the ability to pay closing costs, may be best off listing their home with a realtor and getting it exposed on the MLS for a quick sale.
Sell Home FSB0 (For Sale By Owner)-Home owners with little equity may opt to try and sell their home themselves. They will also have to negotiate and handle the closing themselves.
Short Sale-This is the option for distressed property owners who owe more than their home is currently worth. If they are not able to sell the home for what they owe and make up the difference, they need to get their lender's permission to accept less than is owed, as payoff of the loan (so clear title can be offered to the new buyer).
HAMP-The is the government short sale program. Like HAFA, it has no enforcement and has some inherent flaws that make it a very unattractive option for distressed home owners. One problem is that homeowners are required to begin making payments on their property in order to be part of the HAFA short sale program. Most home owners who need to sell their property short have not been making payments for some time. It is unrealistic to expect them to start making monthly payments on a property they are losing. Another problem with this program is that home owners are required to sign a Deed In Lieu of Foreclosure, meaning that if they "fall out of the program", their house immediately becomes the property of the lender.
Forensic Loan Audit-This is primarily a stall tactic used to make the lender prove that they have the right to foreclosure on a property by proving that they have the original note in their possession. The foreclosing lender must be legally entitled to take action against the home owner. Such audits usually involve all sorts of RESPA and lending practice verifications, as well. Almost every loan and real estate transaction contains some sort of error, so this has proven to be an effective strategy for many borrowers.
Produce the Note-Also, mostly used as a stall tactic, at the end of the foreclosure process, this strategy requires that the foreclosure lender prove that they have the right to foreclose on the loan/property.
Bankruptcy-Filing bankruptcy in federal court will immediately put a stop (albeit temporary) to the foreclosure process in all areas. Normally, lenders will petition the court for a stay to release the property from the foreclosure. These are often granted, unless the home owner has significant equity in the property and it is considered an important asset to the Bankruptcy court. Once the property is released from the bankruptcy, the foreclosure process will pick up right where it left off.
Deed In Lieu = Foreclosure without the lender having to go through the expense and time of the foreclosure process.
Knowing what options are available to a distressed property owner and how they work in your area, gives you the ability to explain each of them to the people you work with, so together you can decide what is the best option for them and their particular circumstance.
Serving your customers in many ways builds trust and relationships that will lead to more business success.
