With the COVID-19 pandemic wreaking havoc on homeowners throughout the United States, governors and lawmakers have taken steps to protect vulnerable homeowners. In New York, for example, Gov. Andrew Cuomo issued an executive order putting a temporary halt to evictions and foreclosures during the summer. A new state law also took effect that allows homeowners with non-government loans who are struggling because of coronavirus to get mortgage forbearance for one year.
Even so, foreclosure remains a concern for many families. Keep reading to learn more about alternatives to foreclosure and steps to take if you are facing foreclosure.
What Is a Foreclosure?
Foreclosure is a legal procedure initiated by the bank or company that holds your mortgage when you fall behind on your payments. As the plaintiff, the lender or company that assumed administration of the mortgage seeks the court’s permission to auction your house to recoup what you owe. This puts you at risk of losing your home.
Here is a general overview of the foreclosure process, which can take up to 2 year from start to finish.
- First, the mortgage holder files a summons and complaint in Supreme Court, and has copies sent to you. The plaintiff will also file a Lis Pendens. This document lets others know your property is the subject of pending litigation.
- Next, you file a response to the summons and complaint. This document is called the answer. In it, you respond to the allegations made by the lender in their summons and complaint.
- In most cases, the next step is a settlement conference. This is where you and the plaintiff meet to discuss ways in which you can pay your debt and keep your home. If you reach an agreement, the case will not proceed.
- If you and the plaintiff do not reach an agreement, the case will go through litigation practice and trial if needed.
Alternatives to Foreclosure
The good news is that there are foreclosure alternatives. In fact, there are at least five alternatives to foreclosure. These include:
- Repayment plans
- Short sales
- Mortgage assumptions
- Deed in lieu of foreclosure
- Loan modification
A short summary of each foreclosure alternative follows.
A repayment plan is an option for homeowners who have missed mortgage payments due to past, rather than ongoing hardship. Based on certain criteria, the lender may let the homeowner pay the missed payments over a certain period. This is done by adding a portion of the overdue amount to each regular monthly payment during that period. Keep in mind that the homeowner must pay the total amount. Once the homeowner has made all of the enhanced payments, he or she simply resumes payment of the original monthly amount.
In a short sale, the homeowner facing foreclosure sells the house to someone else at fair market value, even if it is not enough to cover the amount owed. The lender agrees to accept less than the full amount to satisfy the loan.
If a homeowner has certain types of mortgage, it can be transferred to the next person who buys the house. This only applies to mortgages backed by the Veterans Affairs (VA), Federal Housing Administration (FHA), or U.S. Department of Agriculture (USDA). It does not generally apply to traditional or “conventional” mortgages.
Deed in Lieu of Foreclosure
The homeowner voluntarily surrenders the deed to the lender. In return, the lender agrees that the homeowner owes no additional debt. The agreement should indicate that the deed in lieu of foreclosure fully satisfies the debt.
In this arrangement, the lender agrees to briefly lower or suspend monthly payments for a specific period. At the end of this period, regular mortgage payments resume, and the missed payments are added. This is a good option for homeowners in need of short-term relief.
Filing for bankruptcy is a big decision. One advantage of doing so is that the court will order your creditors to cease any and all attempts to collect outstanding debt. This includes foreclosure. Even a scheduled auction for the sale of your home will be delayed.
Experts say Chapter 13 bankruptcy is generally better for residential homeowners facing foreclosure. It allows you to pay off back payments over the length of the repayment plan. However you must also continue to meet your current mortgage payments. By making e timely payments under your Chapter 13 debt repayment plan, you can avoid foreclosure.
Lenders will typically have a loan modification option available for defaulting borrowers. If a borrower qualifies for a loan modification under the bank’s or investor’s guidelines, the borrower’s loan terms may be changed with the loan term being extended, interest being lowered, arrearages added to the back of the loan, or any combination thereof.
Which Foreclosure Alternative to Choose
The best option for you is the one that addresses your specific circumstances. To identify this option, consult with relevant legal and financial professionals.
Among other things, they can help you sort through the short-term and long-term financial considerations. These typically include but are not limited to immediate and long-term effects on your credit.
Another serious consideration is whether you actually want to stay in your home. All of the home affordable foreclosure alternatives detailed above allow you to pay your mortgage debt. But not all of them allow you to stay in your home.
The following foreclosure alternatives allow you to remain in your home as long as you meet all applicable conditions:
- Repayment plans
- Chapter 13 bankruptcy
- Loan Modification
The following foreclosure prevention alternatives do not allow you to remain in your home:
- Short sales
- Mortgage assumption
- Deed in lieu of foreclosure
How Can Alternatives Affect My Credit?
Different alternatives to a foreclosure sale may affect your credit in different ways.
In many cases, forbearance and “loan modifications” or repayment plans may not change your credit score at all. However, there are some circumstances in which these alternatives may have an adverse effect on your credit. It all depends on how the lender reports it to the credit bureau. Remember, if you were behind on your mortgage payments, the lender has reported all such delinquencies which will remain on the credit report.
With a simple mortgage assumption, the seller is still liable for any remaining mortgage debt. In this arrangement, any late payments or default by the buyer can damage both parties’ credit scores. The seller can avoid this by releasing their liability in writing when the buyer assumes the mortgage. However, this won’t take effect until the lender approves the request.
Experts say a deed in lieu of foreclosure may also harm your credit score because you are settling the mortgage for less than the full balance owed. However, they also say it may not be as damaging as foreclosure. Deed in lieu of foreclosure will also impact your ability to secure a new mortgage for approximately four years.
A short sale may reduce your credit score by 50 to 160 points, depending on your credit history and other factors. Furthermore, the short sale could remain in your credit history for three to seven years. However, you may be able to buy another home in two years in some cases.
Finally, bankruptcy also harms your credit score. But again, it is not as damaging as foreclosure. Once the bankruptcy is discharged, however, you will have a chance to rebuild your credit.
Foreclosure Prevention Coaching
In New York, foreclosure prevention coaching or counseling is available through the Office of the Attorney General’s Homeowner Protection Program (HOPP). HOPP’s housing counselors provide free guidance regarding foreclosure prevention and assess potential options, and evaluate your credit difficulties.
HOPP can also put you in touch with groups that offer legal advice, advocacy and more.
The U.S. Department of Housing and Urban Development (HUD) also offers foreclosure prevention counseling and related services throughout New York. You can find a comprehensive listing by area, here.
What to Do If You Are Delinquent
If you fall behind on your mortgage payments, you may be classified as “delinquent” or “in default” on your mortgage. This classification triggers action by the lender or mortgage holder.
Speak With a Professional to Pick the Best Alternative
If you are a month or more behind on your mortgage payments, the lender will initiate foreclosure. They will also issue a 90-Day Pre-Foreclosure Notice, which you will get in the mail.
At this point, you may want to contact some of the foreclosure prevention alternatives detailed above. That way you can speak with someone who can help sort through your finances. A government-approved foreclosure avoidance coach can also facilitate talks with the mortgage lender to help you avoid foreclosure.
Do I Need a Lawyer for Alternatives to Foreclosure?
Theoretically, you could try to pursue alternatives to foreclosure on your own. However, if you are facing foreclosure, experts recommend contacting a foreclosure attorney. He or she can help you secure a loan modification, forbearance, or repayment plan. He or she can also help with deed in-lieu of foreclosure, and facilitate negotiations with your lender.To learn more about alternatives to foreclosure and how we can help, submit a free consultation form, today.