Foreclosure
When it comes to homeowners delinquent on their mortgage, three options that may be offered are foreclosure, forbearance, or short sale. A foreclosure occurs when a bank sues the homeowner for being delinquent on the mortgage. Either the homeowner has to bring the account current by paying any missed payments and late fees… or the lender will continue with the foreclosure process.
If the foreclosure is completed, it means the home will be sold at a public auction. If the bank doesn’t get an offer that meets their reserve, they will end up taking back the property and selling it as an REO property [real estate owned]. During the foreclosure process, the homeowner may continue to live in the home up until the foreclosure happens. Even after the property gets foreclosed on, homeowners have a period of time to vacate depending on what state it occurs in.
Forbearance Agreement
Another option is to ask your lender for a mortgage forbearance agreement. A mortgage forbearance is designed to help homeowners who are experiencing some type of financial hardship. It’s a repayment plan where a lender suspends or adjusts the mortgage payment for a pre-determined amount of time. The purpose of the mortgage forbearance is to allow a mortgagor to keep their property while they have time to repay the mortgage. Regardless of what the forbearance agreement is, the outstanding loan balance will still need to be repaid to the lender in full.
The duration of a mortgage forbearance can range from 6 months to 10 years, and the mortgage is usually placed in escrow at the end of the term.
What Happens If I Default On Mortgage Forbearance?
If the homeowner fails to meet the terms of the new agreement, foreclosure proceedings will eventually begin again. In many cases, the bank will offer the option of a mortgage forbearance extension to the mortgagor to avoid the foreclosure process. It is often an attractive incentive to the borrower because it does not have to be paid until the end of the term of the loan.
The borrower must decide whether to accept the extension of the mortgage or not. What are the benefits of doing so?
In addition to giving the borrower a second chance to redeem their property from foreclosure. Extending the forbearance agreement also gives the homeowner another opportunity to refinance their loan and possibly get a better price.
Short Sale
If a homeowner is denied an extension on their forbearance, then doing a short sale on the home may be the best option. A short sale is when a lender accepts a discounted amount on what’s owed on the mortgage.
A short sale happens when a homeowner can no longer afford to make the mortgage payment because of financial hardship. Another condition that must be present for a short sale is the home must be worth less than what’s owed on the mortgage.
The homeowner will be required to submit a complete short sale package. If there is equity in the home, the homeowner could just sell the home as a normal sale and pay the bank from the proceeds.
It can be very costly for the lender to take someone through the foreclosure process, which is why a short sale can be a great option for both parties. The bank requires the homeowner to list the home with a local short-sale realtor. This is great for the homeowner because the short sale realtor will work with the lender to short sell the home. There is a lot more work involved in processing a short sale as opposed to a traditional listing.
Work With A Short Sale Expert
If you end up choosing to do a short sale, you must hire a short sale specialist. This is an agent that specializes in doing short sales and is up-to-date on the State’s rules and regulations. Many lenders offer cash incentives to borrowers to agree to a short sale depending on what lender.
Another benefit of working with a short sale expert is they have established relationships with every major lender. Good communication is key when working a short sale with any lender.
Benefits of A Short Sale
- Avoid Foreclosure
- Avoid Bankruptcy
- Eliminate Mortgage Debt
- Less Damage to your Credit- has less of a negative impact than a foreclosure
- Get Cash Back at Closing [depending on the lender and situation]
