A recent Google Trends announcement included a graph of a “breakout trend” for two search terms: Eviction and Foreclosure.
With unemployment rates at record highs due to the COVID-19 pandemic and subsequent business closures, renters and homeowners are still scrambling to make their rent and mortgage payments.
Back in April, “New mortgage delinquencies hit a record, … well above anything seen during the Great Recession,” according to Andrew Van Dam at WashingtonPost.com.
Some of these homeowners are taking advantage of forbearance offered by their lenders, others, because their loans aren’t backed by the Federal Government, are sadly at risk of losing their homes and investment properties.
In fact, when those with deferrals are removed from the equation, “… about 8.4 million households missed a mortgage payment” as of the end of June, according to Van Dam.
If you are among them, read on to learn about how you can avoid foreclosure and the devastation it brings to your credit rating.
The ramifications of foreclosure
There are several tough consequences when a homeowner allows the home to go into foreclosure:
- You will lose your home.
- You will lose any equity in the home.
- There is a waiting period before you can purchase another home. For a conventional loan, you’ll need to wait seven years. If you can prove extenuating circumstances (which you most likely have, given the pandemic), the waiting period is three years.
- Your credit will need to be repaired before considering another home purchase. “… if your credit score is 680, a foreclosure will drop your credit score on average by 85 to 105 points,” according to FinancialSamurai.com, citing the experts at FICO.
- The damage to your credit score may affect how much you pay for insurance, whether or not you’ll qualify for a job and even your ability to rent a home.
Alternative number 1: Sell the home
Selling the home is the most obvious choice for the distressed homeowner. Yes, your lender will get paid from the proceeds of the sale and you may not end up with as much money as you’d hoped.
The advantage to this solution, however, is that your credit score won’t be impacted as hard as it will if you allow the home to be taken by the lender.
“If your credit score is excellent at 780, a foreclosure will drop your score by 140 to 160 points. In other words, the higher your credit score the more it will get smashed!”
If you sell the home, however, the late payments or even missed payments won’t be as tough on your credit.
Plus, you may be able to qualify to purchase another home right away or within 12-24 months. We have several credit repair persons that we work with to help our clients repair any dings on their credit so they can buy again as quickly as possible.
You can sell your home if you have agreed to a forebearance or loan modification. We specialize in this. We help you neogtiate with your bank to sell your home to preserve your credit and your equity. We even negotiate with your lender to give you reloaction assistance money. Sometimes this amount can be as high as $30,000. It can be far more economical for your lender to help you move and allow you sell your home verses going the legal route and foreclosing. We specialize in this process which is referred to as a directed equity sale. We have worked with countless banks for the past fifteen years and understand their policy and procedures and can help navigate you through this difficult time and process.
If you do not have any equity or owe more on the home than what it is currently worth (after paying the cost of sale and late fees), not to worry, we can still negotiate with your bank to take less than what you owe. This is known as a short sale. By law, if the bank agrees to a short sale, they must forgive any outstanding debt that was not paid off with the sale of your home. A short sale is also a much lesser hit on your credit, allowing you a fresh start and a chance to buy a home again in as little as 12-24 months. Based on what’s happened to our current economy, this could become a time-frame when home prices will be lesser than what they are now, allowing you the opportunity to purchase a better home for a better price. We can help you with this process from start to finish and carefully explain every step. Even if you must opt to do a short sale instead of a directed equity sale, we can still negotiate with your lender to give you relocation assistance money so you can have the peace of mind to cover your moving expenses and rental deposits on your new place while you rebuild. This is a great option that will remove the stress and pressure and allow you to start over with a clean slate.
If your loan is delinquent and you’re considering selling, the longer you wait, the less money you’ll end up with at closing. Each day that goes by, the more interest, late fees, and legal fees will be tacked onto your loan if you are behind on payments. Reach out to us and we’ll show you how we can sell your home quickly and for the most money the market will allow.
2. Deed in Lieu of Foreclosure
A deed-in-lieu of foreclosure agreement is one in which the lien holder agrees to take the deed back in satisfaction or partial satisfaction of your obligation, in lieu of foreclosure.
Government entities, such as the FHA and the Veteran’s Administration, have their own deed-in-lieu programs with various requirements. Typically, these programs and lenders in general require that the property be lien-free before they’ll accept it back.
Why would a lender agree to enter into this type of an agreement? Since this arrangement is quicker and less expensive than foreclosure, according to Gary Neustadter, Santa Clara Law professor, a lender is more likely to be amenable to the deed-in-lieu agreement if it believes that the home is worth close to market value or to the amount of your debt.
There are tax ramifications to this alternative, so consult with your financial adviser before proceeding.