Should I Stay or Should I Go? – ALL of your Foreclosure Options, Right Here, Right Now
By Stuart R. Simone, Esq.
It’s a sad morning when you open your mailbox and find a Notice Of Default – they want to sell your home … to the highest bidder! The word “foreclosure” takes on a whole new meaning. Sure, your brain knows you’ve had financial challenges and have been struggling to make your mortgage payments, but that Notice Of Default (“NOD”) in the mail or posted on your home punches you in the gut and sets you in “Panic Mode.” If receiving the NOD wasn’t enough to shock you into action, then receiving a Notice Of Trustee Sale (“NTS”), where you are notified of the date, time and location of the place where your home will be auctioned off, should get your heart racing, your head spinning, and your stomach tied in knots. This is a natural reaction, as the possibility of losing your home triggers the human “fight or flight” response. But now is not the time to panic, it’s the time to LEARN! They say “Knowledge is Power,” but Knowledge also is a “medicine” that will make you feel better. The goal of this article is to give you as much knowledge as possible regarding your options at this critical point in your life, so that you can make the best decision possible for you and your family. This could well be one of the most important decisions of your life, so you want it to be well-informed.
Why is this article important to me? If you are in default and facing foreclosure, you need to avoid foreclosure at all costs. Foreclosure is the most negative event you can have in your credit report, and the effects can up to a decade. It will make buying a home impossible for several years and at much higher interest rates after that, jack up the interest rate on any credit cards that you might be able to get, hurt your chances at finding a place to rent, and possibly even affect your chances of landing that great new job.
As far as we know, this is the only Article that gives you ALL of your (legal) foreclosure options as of January 1, 2018, and gives you a quick checklist to see which ones are available to you.
Options 1-6 allow you to keep your home.
Options 7-11 are for those who realize that their best move is… to move.
After working in the foreclosure business for many years, it’s heartbreaking to meet people who should have sold their home continue to fight to keep it… only to lose their home to foreclosure in the end. You don’t want to be one of those people. You want to know what the best course of action is, and this article was written to help you answer that question. However, even after reading this article, we recommend that you call G&S for a free 30-minute legal consultation, because having practiced foreclosure defense law for the better part of a decade, we are best-equipped to say whether you should STAY or GO.
Option #1— Loan Modification. This has probably been the most popular option in the past few years. However, the glory days of getting your loan modified with an interest rate of 2% for the first five years are officially over, with the expiration of the HAMP Program. Many homeowners don’t realize that HAMP – “The Home Affordable Modification Program”, a federal government program introduced in 2009 to respond to the subprime mortgage crisis – expired at the end of 2016. This is a big deal, as HAMP gave mortgage lenders – for the first time – guidelines for granting loan modifications, as well as subsidies (kickbacks) to the lenders to give them an incentive to grant loan modifications. Now that HAMP has expired, borrowers are at the mercy of their Loan Servicers, who now have no incentives and practically no oversight in the loss mitigation process. Top Foreclosure Defense law firms, such as Gomez & Simone (the Southern California law firm affiliate of the Stay Or Go Network), are able to use remaining state and federal laws to protect homeowners who are facing sale dates, but the Legal Landscape has definitely shifted to the Banks’ favor. Lenders will only give you a loan modification if it makes sense for them, meaning the amount they can get after auctioning off your home is less than the amount left on the loan. In other words, in most cases your home must be “under water,” meaning that the fair market value of your property (the “FMV”) is less than what you owe on your mortgage. When you submit a loan modification application, Mortgage Servicers will run your application through the “NPV Test”, which at the end of the day means that you can forget about getting a loan mod if your home has more than a little equity. The good news is, California still leads the way in Homeownership protection with the “Homeowner Bill of Rights,” which still protects homeowners – that means your primary residence in a 1-4-unit property – against the dreaded practice of “Dual Tracking,” where one department of the bank reviews your loan modification application and tells you you have a chance, while another department sells your home at foreclosure auction to the highest bidder. So if you (a) submit loan modification application(s) to your lender, you should get some relief from foreclosure… temporarily. But you’re still at the mercy of your lender as to whether they will approve your application in the end. Unless your home is underwater or has little to no equity and you now have a steady job making a substantial income (but not too low or too high), then your odds of obtaining a loan modification are dicey at best.
This option is available to you if: Your home is underwater, and your monthly income is over twice the amount of your mortgage payment. (To find out approximately how much income you need, divide your monthly gross income by 40%. For example, if your mortgage payment is $2500/month, your gross monthly income should be at least $6,250.)
Option #2— Forbearance Agreement. For some reason, lenders are unwilling to exercise this loss mitigation option, which in my opinion is a major flaw in US Mortgage Loan Industry custom and practice. There really should be a law requiring lenders to offer this option, as it would prevent most foreclosures. This type of workout breaks your “arrears” (the amount of the payments that you missed plus the late fees) into 6-12 monthly payments, which are added to your regular monthly payment, and the servicer often requires an affordable down payment. Unfortunately, lenders are not required to do this, and usually just prefer to call the loan due and require a single lump sum payment.
This option is available to you if: You fell behind recently, you now show enough income to pay your current monthly payment plus more, your payment history with your lender was excellent until your recent default, and you have a cooperative loan servicer.
Option #3— Reinstating your Mortgage. Like Loan Mods and Forbearance Agreements, this involves working with your lender to keep your existing first mortgage. The difference is, you are working with a second lender to get a smaller loan to pay off the arrears of the first mortgage.
There are two basic ways to do this:
(1) Get a Personal Loan – as the song says, “That’s what Friends Are For.” This is the fastest and easiest way to stop foreclosure and keep you home. But there are several downsides. Simply approaching family and friends and disclosing that you are in foreclosure is embarrassing, and it’s possible that they may not be able to help you anyway. Negotiating terms of a business deal with a friend or relative is awkward enough, but image what would happen to your relationship if you defaulted on the personal loan – the lender would need to foreclose on the home of their friend/relative to be paid their money back.
(2) Get a Hard Money Loan – Unless you have a kindly rich friend or relative, you’d need to find a “hard money lender”, probably pay a high interest rate, at 10% or more. These hard money lenders don’t care about good credit as much as they do about (1) significant amount of equity in the home, and (2) good terms on the existing first mortgage. If you just recently got behind, you can try standard mortgage lenders, but if the lender found out you are in default, if they offered you a loan at all, it would be at a 10% interest rate. Also, they wouldn’t lend if the total of both loans exceeded 75% of the FMV. Finally, keep in mind you will be making two mortgage payments every month, and the second mortgage would be at a high interest rate.
Another option for some folks is to borrow against their 401K of Cash Surrender Value of their Life Insurance Policy, two options that can literally mortgage your future. Withdrawing early from your 401K can subject you to penalties and taxes, and both of these withdrawals could take too long to stop the foreclosure in any case. Plus, there are fees and penalties if you don’t repay the accounts precisely as agreed.
This option is available to you if: You have at least 25% equity in your home and you now show sufficient income for two loans. Request a “Reinstatement Demand” from your current servicer to see how much money you’ll need to borrow to take your current loan our of default.
Option #4— Government Homeowner Programs. Some FHA loan homeowners may be eligible for the FHA Insurance Fund where a one-time payment is awarded to the FHA Homeowner to cure the delinquent debt. California homeowners should also contact KeepYourHomeCalifornia. These programs offer the money to reinstate the loan. Most are for the borrower’s principal residence only. The downside is, you now have a lien for a second mortgage on your property.
This option is available to you if: You fell behind recently and you now show enough income to pay your current monthly payment.
Option #5— Refinancing. While Loan Modifications and Reinstatements involve your current loan and your current lender, this means that you get a brand new loan with a different lender. You can try to get a new first mortgage to pay off your current loan, but remember that your interest rate will be several points higher and thus your monthly payment will be significantly higher that your current payment, especially considering the late fees, costs and penalties that have been added to your current loan. Lending guidelines require that the total of all home loans is less than 75% of the FMV of your house.
This option is available to you if: You have equity in your home, you only fell behind recently, you now show increased income, and your credit was excellent until your recent default. Request a “Payoff Demand” from your current loan servicer to see how much money you’ll need to borrow to refinance your first mortgage.
Option #6— Bankruptcy. As you can see, stopping a foreclosure is a complex process with plenty of uncertainty. The good news is, there is one fact that is simple and certain: Filing a Bankruptcy will* stop a Foreclosure, even if the foreclosure is only minutes later. (*Well, there are a couple of caveats, the most common being that one or more foreclosures were open during the year prior to the filing.) In fact, if you’re thinking of the foreclosure option, we strongly recommend consulting with a Bankruptcy Attorney, such as Gomez & Simone Law, the Southern California affiliate of the Stay Or Go Network. The sobering statistics are that 86% of all bankruptcy filers will lose their homes, and only 5% of Chapter 13 homeowners make it all the way through their repayment plan. Sadly, we’ve had many unhappy former homeowners who tried filing for bankruptcy themselves and then not only wrecked their credit for years to come, but ended up losing their home to auction because they didn’t understand the subtlety of the bankruptcy laws. I’ve been in court and heard many different judges advise debtors that they need to hire an attorney if they hope to save their home with a successful Chapter 13 case. Fortunately, Gomez & Simone are not only Foreclosure Defense specialists, but also experienced Bankruptcy Attorneys.
The most basic bankruptcy concepts are: (1) Chapter 7 is a “liquidation” bankruptcy that will only temporarily stop a sale, and is a very bad idea if there is equity in the property, (2) Chapter 13 is a “Reorganization” where the borrower pays off his arrears over (usually) five years, and if done right, can stop your lender’s foreclosure efforts permanently, (3) filing multiple bankruptcies within a year is to be avoided for many reasons, and (4) any bankruptcy filing can cloud your credit report for seven years or more. Bankruptcy can be the perfect solution for a homeowner in default… but you need a consultation with an experienced bankruptcy attorney to find out if this is true for you.
This option is available to you if: you have a social security number. But whether to file is a decision you should only make with the advice of a bankruptcy attorney.
Option #7— Walk Away. Taking no action is undoubtedly the worst action you can take. Your credit will be wrecked for up to ten years, and landlords won’t want to rent to you. Beware of scammers who advise you to let your home go to auction and promise that you’ll make more money from the surplus, or that they’ll rent the home to you after they buy it. You will never make more money after an auction due to the costs involved and the fact that auction buyers these days are mostly professional bidders who will stop bidding before the property gets to fair market value. And even if they rent back to you, your credit is still ruined for years.
This option is available to you if: You don’t care about your credit and you can move in with your parents.
Option #8— Deed in Lieu. A Deed In Lieu of Foreclosure (“DIL”) is probably the worst option short of simply giving up and allowing your home to be foreclosed at auction. Often a last ditch effort by the borrower to avoid the severe negative consequences of foreclosure, a DIL is very hard to get, as it is a contract between you and the mortgage lender and both parties must agree to all the terms. If there is any equity in the property, then you won’t agree to a Deed in Lieu because you would be waiving any right to receive that money, and if there are any junior mortgages or other liens on the property, the foreclosing lender will not agree to a DIL because foreclosure would bet a better option for the bank. Moreover, the numbers need to fall with a certain small range for a DIL to be an option for the lender.
This option is available to you if: Equity is close to 0% (the balance of the loan is almost the same as the fair market value of the property) and Title is clear. Tip: you want to make sure there is a “no deficiency” clause in the contract.
Option #9— Short Sale. This option was very popular in the years since the great mortgage meltdown, but is becoming less common now that property values have been rising. You can’t have a “short” sale unless the property is worth less than the balance on the mortgage(s). Realtors have convinced the public that the credit hit for a short sale is less than for a foreclosure, but depending on how the lender characterizes the debt, that may or may not be true. What is definitely true is that a short sale is a long process filled with paperwork.
This option is not for you if you value your privacy, because the lender will require all your financial documents since the borrower must prove that they have no other assets. What’s more, the lender will require that all junior liens must be paid off (as with a Deed In Lieu) and they must approve the buyer and the selling price. Worst of all, lenders can go forward with foreclosure unless and until they approve the Short Sale, so they have little incentive to approve it. What we have seen many times, especially when prices are rising, is the lender dragging out the process until the FMV matches the debt amount and then foreclosing on the home. And if you are successful in getting the Short Sale, your short-term happiness will be shattered when you get an IRS 1099 in the mail, as the amount of the mortgage over the FMV of your home is considered earned income, and you’ll be paying income taxes on money you never saw. See my Article, “Short Sales: The Long and Short of It” for more details.
This option is available to you if: Your home is underwater (but not too much), you have at least three months before a sale date and a Realtor experienced in Short Sales.
Option #10— List your home For Sale. There are two basic ways to do this:
(1) Hire A Realtor to List your home on the MLS – Since selling a home “the traditional way” usually takes 2-4 months, you want to find and hire a reputable hard-working Realtor as soon as possible. If you have a foreclosure sale date less than two months away, most Realtors won’t even take the listing, because if your home is auctioned off before they can sell it, they make nothing (and have lost their time and the money they spent on marketing). Hiring a Realtor is a major decision, because once you list your home, you probably won’t be able to find a lender willing to re-finance it. Unless your home is in “marketable condition” – i.e. clean and fairly updated – your Realtor will advise you to spend money to make it appeal to homebuyers. Keep in mind you will be taking a big risk because even if you quickly find a buyer who will agree to your price, you’ll still need to wait for the entire sales escrow process to wrap up before the bank sells your home at auction. The process – lenders appraising the house, approving the buyer’s credit, completing underwriting, reviewing title, getting payoff demands and drawing up documents – can take a month to complete even after the buyer signs, and that’s assuming no problems pop up. And if the buyer’s financing eventually falls through, you have to start from scratch.
The odds are very low that a Realtor will sell your home if you are in foreclosure. Realtors are just like anybody who has a performance-based income: they focus on those deals that are most likely to pay them. If a house is four to six weeks from auction they’re not likely to find a buyer and then still have time for that buyer to close traditional escrow – which is 30-45 days – so they’re not going to spend money or time to sell your property when they have other properties to sell. This is one reason I have seen so many homeowners lose their homes to foreclosure after listing their home with a Realtor. The fact is, there is no law that prevents a lender from foreclosing during a standard sale, and I have seen lenders foreclosure just a day or two before the closing date. You can’t take that chance.
This option is available to you if: you have at least three months before a sale date and your home is updated and clean (i.e. “Marketable.”) By the way, if you have less than 8% equity, you will end up having to pay to sell you home, as the Realtor commissions add up to 6%, and there are closing costs and holding costs as well. Remember, the amount you have to pay off your lender when you sell increases by the amount of your monthly mortgage plus late fees every single month that your house is sits on the market.
(2) For Sale By Owner (“FSBO”) – Although you the owner would have more “control” over the selling process, you would need to handle everything. The key to every successful home sale to traditional buyers – i.e. families – is getting your home notice by enough potential buyers, which means advertising! Besides spending ad dollars, you need to keep your home in “showing condition” and since you are the direct seller, you’ll need to be ready to show your home to a potential buyer at any time, especially after work and on weekends when most buyers are house-shopping. Once you’ve shown your home to a number of buyers – and some several times as the buyers bring back other family members and friends – you will then need to deal with home inspections, electrical and plumbing surveys, roof certifications and the like. If any of these inspections find anything of concern, your buyers will ask for a discount, and you will be the one having to negotiate through all of this with the added pressure of a looming foreclosure. Is all of that stress and hassle worth saving 3%? And do you even have the negotiating skills and real estate experience to keep yourself from being taken advantage of by a savvy buyer’s realtor?
This option is available to you if: you are experienced in real estate, a good negotiator, understand effective marketing…. and have plenty of free time.
Option #11— Sell to a Real Estate Investor (“We Buy Houses” Companies). Unless you are confident that you can keep your home using options 1-6 above, selling your home to a “Fast Sale” company like Stay Or Go Network affiliate 7 Day Sale is the way to go for a number of reasons:
- Selling to a “We Buy Houses” (“Fast Sale”) Company is the least stressful of all options; once you agree on a price, the company takes care of all your problems, including most of the paperwork, and all you have to worry about is packing.
- The process is fast and simple: The “We Buy Houses” Company makes you an offer which you can accept then and there or “think on it.” This number is the “all-in” price, as there are no fees, no interest, no commissions, no holding costs and no closing costs. Once you accept the offer, you won’t need to worry about finding a buyer and hoping the buyer’s financing goes through, as the Fast Sale company is the buyer.
- Your home will be sold “as-is,” so you don’t need to upgrade it or even clean it.
- If you have equity in your home, then you need to sell your property before it is auctioned if you want to recover all your equity, as the foreclosure adds costs and fees to your loan balance, not to mention the sale price at the auction would be lower than fair market value. Realtors can rarely get escrow closed in time, while a “We Buy Houses” e Company can usually finish the entire process in as little as seven days.
- Not only can Fast Sale companies sell your property before the bank can sell it at foreclosure auction, but in many cases they can tailor a deal so that your credit will actually be improved for the next few years after the sale.
- Selling to investors is much faster and more predictable than selling to families. The traditional buyers are looking to move in themselves and make it their home, so they often get emotionally involved and keep coming back for more showings, and asking for more things from you. On the other hand, once an investor is confident that there are not any major defects in the property, he pays off your lender with cash, the foreclosure is stopped, and the sale is completed in as little as seven days.
- Selling to a “We Buy Houses” company is by far the best outcome for your credit, since you will have no foreclosure on your record and the credit record will show that your mortgage was paid off. Better yet, there is a good chance that you will qualify for a credit rehabilitation program, so your credit will actually be improved after the sale.
This option is available to you if: you find a “We Buy Houses” company that you trust, and understand that if you can’t keep your property, you need to sell it before the bank can auction it off. Although the offer that the Fast Sale buyer gives you may seem very low at first, it actually is not. Remember, selling with a Realtor not only has closing costs and 6% in commissions between the seller’s and buyer’s agents, but every month that the house sits on the market means you are “paying” mortgage, late fees, interest, utilities, property taxes and so on. (For example, if your mortgage payment is $2500/month and it takes four months for the Realtor to close your sale, then $10,000 is subtracted from the sale.) While there have been many blogs and articles written saying that “We Buy Houses” companies make huge profits and rip off the sellers, look who is writing them: Realtors! The fact is, in the end, “We Buy Houses” companies make about the same as two Realtors, around 6%, and unlike Realtors, they take all the risks. And most important to you, you avoid foreclosure completely! That means your credit is saved, and you will be able to keep more equity than you would if your home was auctioned off by the bank. Keep in mind, when comparing fast sale companies to Realtors, there is a trade-off between Time and Money, but with a foreclosure sale looming, TIME is of the Essence. In most cases, selling your home to a trusted “We Buy Houses” company like 7 Day Sale is the right move.