Unfortunately there is a lot of mis-information
about what to do when you go into foreclosure. Most of the
folks who contact you are primarily interested in selling
“their” solution. Here is a brief summary of your real options,
some things to watch out for and some legitimate sources of
information. I hope it helps!
Your options once in foreclosure:
the money to bring your loan current.
Easier said than done. But if your financial problems were just
temporary, and you can make your payments going forward, it
might be worth selling something, or working weekends to catch
2. Work it out
with your lender.
The number one mistake most people make when facing foreclosure
is not talking to their lender. The idea that the lender wants
your house is largely a myth. It is typically in their best
interest to work things out with you, especially if your
financial problems are temporary. Options they can offer
Typically they modify your loan to add the past due amount to
the principal balance which spreads repayment over the entire
loan term so that you only have a small payment increase.
Allows you to repay the past due amount over a period of time.
Your home typically stays in foreclosure during the
forebearance so be very careful that NO payments are late
during this time as the lender can foreclose on your house
immediately if just one payment is late with NO further
If the value of your home has decreased, the lender may be
willing to accept less than the full amount due upon sale of
your home. Note that they will typically require proof that
both: a) the house is worth less than you owe (after sales
commission, taxes and other fees), and b) that you no longer
have the financial ability to make the payment. Be sure to
hire a Realtor with short sale experience to handle the sale.
The lender allows you to hand over the keys and walk away.
This is very rare as the lender then becomes responsible for
any additional debts you may have encumbered on the property.
They typically prefer to complete the foreclosure which wipes
out loans and liens that were incurred after
theirs. Nonetheless, it never hurts to ask.
Get a New Loan
- either refinance the existing loan, or obtain an additional
loan. Even if your credit has taken a hit you may find that this
is still possible, especially if you have equity. Just make sure
that when you are done you can afford the new, likely higher,
payments. There are a number of options when getting a new loan:
This is simply a new loan for enough to cover the principal
and past due amounts on the existing loan(s). With rates going
up, and your credit likely going down, you may find that the
new loan has significantly higher payments. If you currently
have a good loan with a low rate, you may want to consider
Take a Home
Equity Loan or Home Equity Line of Credit:
If you have just one loan on your property and sufficient
equity you may want to consider a home equity loan, or 2nd, to
repay the past due amount. Most banks offer these and the
process can take less than 2 weeks.
These loans are made without any regard to your credit and are
based solely on the equity in your home. They tend to be very
expensive both in the fees charged and the interest rate. That
said they still may make sense if you have sufficient equity
and a good plan to pay the loan down quickly.
Finance Loans / Credit Cards.
Depending on the damage already done to your credit you may be
able to borrow a sufficient amount to bring yourself current.
Like hard money loans the interest rates tend to be very high,
though the fees tend to be far lower.
If your financial situation is anything other than really
temporary this should be your first choice. It has been said
that a man’s home is his castle, but owning a home you can not
afford often feels more like a jail, no matter how much you may
think you love it and can not live without it. If you choose
this option, just remember that it can take quite a bit of time
to sell, especially if you want the best price, so it is best to
start early. To sell you have a number of options:
You’ll typically net the most money with this option. While
the Realtor takes a commission from the sale, they can often
get a higher sale price for the home. The key is to find a
GOOD Realtor. Not your family member or friend who will list
it cheap because he or she really needs the listing. Find a
knowledgeable and experienced agent in your area. Also make
sure to keep your lender in the loop and verify that you have
enough time before the foreclosure auction. If there isn’t
enough equity left in the home to price it correctly then make
sure the Realtor is experienced with negotiating a short sale
with the bank (see above).
For Sale By
You save the commission but do all the work. You pay for
advertising, you take all the phone calls, schedule
appointments for showings, allow Buyers into your home that
you are unable to screen (most professional Realtors will
screen or prequalify ALL Buyers prior to expending any
resources and man hours to assure they are not just window
shopping). You also risk incorrectly pricing your house which
will either keep it from selling (priced to high), or net you
less than you deserve (priced to low).
to an investor:
You’ll definitely get less money, but if time is running out
and you just want to move on this can be a viable option. Be
careful of "subject to" sales, and avoid lease option deals
where you get a promise that you’ll be able to buy the house
back at a later date.
The first thing to know about this option is that it does not
truly stop foreclosure, it typically just delays it. The lender
is considered a “secured” creditor by the bankruptcy system and
that essentially gives them the right to either be paid in full
or receive the security (in this case the home). If you remain
unable to make the house payment you will ultimately lose it in
foreclosure, and the bankruptcy will only delay the inevitable
and worsen your credit. Note that a bankruptcy stays on your
credit report for 10 years, a foreclosure only 7. If on the
other hand you are struggling due to high credit card debt,
judgements, wage attachments or other financial problems that
can be restructured under bankruptcy, it might be just the
ticket. The key here is to find a really good bankruptcy
attorney that will give you honest advice, and not just take
your money to file a bankruptcy that will hurt more than help.
Know all your options, find good, qualified
people to help and you’lll do just fine. A couple of gotcha’s to
watch out for:
A lot of folks prey on homeowners in foreclosure. If something
sounds to good to be true it usually is. Remember that fraud
depends on trust. The folks that are the best at it always
appear to be someone you can trust. So be careful, use common
sense, and don’t be afraid to talk to a lawyer, your lender, or
a seasoned real estate professional about any offers you
Depending on the state you live in, and the type of loan you
have the lender might be able to get a deficiency judgement
against you if they receive less than what you owe. So check
your state laws, and do everything you can to maximize the homes
sales price to minimize the possibility of a deficiency. Say
you have a $100,000 loan and the house sells at foreclosure for
$80,000… you could get a deficiency judgement for $20,000. It
does not always happen but more and more lenders are exercising
Note that if the lender receives less than they are owed you may
get a 1099 at the end of the year for the amount of debt that
was “forgiven”. Say you have a $100,000 loan and the house sells
at foreclosure for $80,000… you could owe taxes on $20,000 of
income. If possible talk to a tax advisor or accountant to
better understand the impact of this.
It is important for you to know that the lender cannot pursue a
deficiency judgment AND issue a 1099. They can only do one or
the other, not both.