August 29, 2007
Foreclosure Options For Homeowners
Understanding the different options a seller may be considering is important when dealing with a property in foreclosure. Below are the most common options that sellers may address with you if the sellers are either in default or anticipating being in default.
1. Reinstatement of Loan (Cure): This option is paying the lender everything that is owed in one lump sum to include missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor "subject to" the existing loans, who will cure. There is a risk to the homeowner that the lender may accelerate the loan because of the due-on-sale, and the homeowner no longer owns the property and has no recourse if the investor doesn't pay the loans.
2. Repayment Plan: This is a written agreement between the lender and the seller. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.
3. Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.
4. Forbearance Agreement: The lender will allow you a period of time (3-6 months typically) of either low payments or no payments at all. Unless the loan term is extended (which happens rarely), the later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date.
5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments.
6. Deed-in-Lieu: A Deed-in-Lieu is an option in which a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who can financially make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the "Cash for Keys" program.
7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough, which most often requires a substantial drop in the price.
Explain each of these choices, and be honest with the homeowner. In many cases, he will trust you for your candid explanations. You may lose a deal or two by offering the homeowner choices that are actually BETTER than your offer, but that's OK – always take the high road and you will have a long and prosperous business in real estate investing.