Real estate foreclosure is a stressful event that can be frightening and embarrassing. No one wants to lose their most valuable asset and be uprooted from their home. However, options exist that can help borrowers prevent foreclosure or lessen credit damage.
When real estate foreclosure occurs, credit scores can plummet by 100 points or more. Individuals facing foreclosure have usually incurred credit damage due to late mortgage payments. Further reduction of FICO scores could place them into a high-risk category, which in turn makes obtaining credit more difficult and expensive.
To add insult to injury, banks can obtain court-ordered judgments which hold mortgagors financially responsible for any deficiency between the purchase price and loan balance. Since bank owned real estate is typically sold at 10- to 20-percent below market value, deficiency judgments can amount to thousands of dollars and take a lifetime to repay.
The combination of foreclosure and deficiency judgments can cause serious damage to credit scores and make it nearly impossible to obtain financing of any kind. While real estate foreclosure remains on credit reports for 10 years, deficiency judgments are reflected for up to 7 years after the debt is fully paid.
One of the primary reasons homes fall into foreclosure is because borrowers are not proactive. Contrary to popular belief, banks do not want your house. When mortgagors take action early on they can often negotiate a payment plan to cure mortgage arrears and get back on track with future payments.
Once borrowers default on home loan payments their account is assigned to a bank loss mitigator. This person is responsible for keeping bank losses to a minimum, so they prefer to help borrowers create a plan so they can keep their house. If borrowers are financially incapable of curing mortgage arrears, loss mitigators can offer solutions which make the foreclosure process less costly.
The most common options offered to mortgagors facing foreclosure include loan modification, mortgage forbearance, and mortgage refinance. Mortgage lenders typically require borrowers to submit financial records to determine which foreclosure prevention option is best suited.
If borrowers do not qualify for these options, banks might offer a real estate short sale. The short sale process is complex and time-consuming, but can reduce the impact against credit scores. It is best to work with a real estate lawyer to ensure documents are submitted in a timely fashion and to obtain a payment in full agreement.
Payment in full means lenders agree to accept the short sale purchase price as payment in full toward the loan balance. It is best to obtain legal advice when lenders issue short sale deficiency judgments. Depending on the circumstances, it might be better to request a deed in lieu of foreclosure.
Deed in lieu requires borrowers to hand over the keys to their house and walk away. Borrowers are not entitled to any funds if the property is later sold for more than was owed on the loan. Banks can issue deficiency judgments with deed in lieu contracts, so be certain to understand the process before signing an agreement.
Although real estate foreclosure can be demoralizing, realize life will go on if the bank repossesses your house. There are numerous rental properties owned by landlords willing to work with tenants unable to pay security deposits and upfront rent payments. It may take time to find the perfect house with the perfect landlord, but they do exist.
Last, but not least, if real estate foreclosure occurs it is important to commence with credit repair strategies as quickly as possible. If necessary, obtain credit counseling or conduct research to learn credit restoration techniques. Individuals that commit to rebuilding their credit could potentially qualify for a mortgage loan within a few years.
