How to Avoid a Foreclosure: Sell or Give to the Lender?

Lenders have several options in their own arsenal to help homeowners avoid foreclosure. From repayment plans to loan modification programs, it’s usually in the best interest of these lenders to negotiate and work out an alternative in order to keep the borrower’s possession of the home. Struggling homeowners should think about all the options available to them, not just to keep ownership, but to also keep their credit standing. However, in case all choices are exhausted, homeowners can relinquish possession and be absolved from further debt obligations via a preforeclosure sale, short sale or a deed-in-lieu.

Try a preforeclosure sale of your house. The interval between a notice of default and a notice of sale gives borrowers the chance to cure mortgage delinquencies by either paying it back or with proceeds from a home sale to satisfy the loan. Properties are promoted at market value. If the sale proceeds are not sufficient to pay back the whole loan balance, the seller should personally satisfy the deficient quantity. The period will last months, based upon state law. Back in California, lenders need to give an additional 90 days on top of the time frame given in a notice of sale to allow mortgage parties to work out an alternative.

Consider a short sale. A short sale occurs when the creditor agrees with a sale price under the outstanding loan balance. Short sales generally occur 6 months after the first missed monthly payment, although times may vary based on state legislation. Having a short sale, the debtor will stave off a foreclosure but suffer a negative strike on his credit score. Furthermore, lenders may lawfully pursue a debtor for losses. For example, a home with a mortgage balance of $100,000 that sold for $80,000 will have a high amount of $20,000. As a result, the creditor may pursue the debtor to the remaining $20,000 with a deficiency judgment. But, nonrecourse states such as California prohibit lenders from pursuing a deficiency judgment. In nonrecourse states, lenders may only reclaim the underlying security to cure losses.

Negotiate a deed-in-lieu. A deed-in-lieu occurs when the borrower voluntarily relinquishes possession to the creditor in exchange for release from all further debt obligations associated with the property. Lenders may deny a request for a deed-in-lieu if the mortgagor cannot prove her inability to keep mortgage payments after a repayment plan or loan alteration. Be aware that a deed-in-lieu will negatively affect a borrower’s credit score just as far as a short sale or a foreclosure. But a deed-in-lieu indicates a willingness to the borrower’s part to cooperate, which may help in procuring fresh lines of credit later on.

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