Explaining Foreclosure Options to the Homeowner
by Bill Bronchick
Understanding the different options a seller may be considering is important
when negotiating with sellers. 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 exisiting 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
of 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.
8. Short Sale: The borrower makes an agreement with the investor to sell it for
less than is actually owed, subject to approval of the lien holders. This
generally results in no cash to the homeowner, but will be better for the better
for his credit than a completed foreclosure.
9. Refinance: The borrower may be able to refinance and get a new loan, but
generally this is difficult because the borrower has little equity and poor
credit. The new loan likely will have higher payments than the old loan.
10. Do Nothing: The worst choice for the seller, whose credit will be ruined,
but he can stay in the house for several months for nothing, save up some cash,
and move when the lender or the high bidder from the auction eventually evicts
the homeowner.
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 properous
business in real estate investing.
Bio:
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney,
author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real
estate since 1990, having been involved in over 600 transactions. He has
appeared as a guest on numerous radio and television talk shows including CNBC
Power Lunch. He has been featured in Who's Who in American Business, Money
Magazine, the Los Angeles Times and the Denver Business Journal. William
Bronchick has served as President of the Colorado Association of Real Estate
Investors since 1996.