Foreclosure – Part 8 of 8

Part 8: Foreclosure

Part 8 of an 8 part series -

Goal: To educate a home seller on the options when selling their home.

“What are my options?”

This is one of the most common questions I receive from home sellers, and it’s a valid question. How do you, as a home seller, expect to make an informed, intelligent selling decision without knowing all the options you have available? The short answer is you can’t. But don’t fret! The goal of this article is to clarify and explain all the options you (home seller) have when liquidating your property.

Below is an outline of the options at your disposal (in no particular order):

1. Traditional Listing
2. Net Listing
3. Mortgage Assumption
4. Cash sale (off market)
5. Owner financing
6. For Sale by Owner (FSBO)
7. Short sale
8. Foreclosure

Now that you know all eight options let’s dive into more detail describing each option and cover a few pros and cons.

8. Foreclosure – A foreclosure is the process of a lender attempting to recover a loan balance (in addition to fees, late penalties, etc.) from a borrower that hasn’t made the agreed upon payments. The lender collects this debt from the borrower by selling the asset (house or property) that was used as collateral. The foreclosure process varies widely between states and lenders differ in how much they will cooperate with you (seller). This can lead to a great deal of confusion so please seek local legal advice.

• Pros
  • You can stop making payments. After the foreclosure process has started there is no need for you to continue to pay the mortgage, although making (full or partial) payments may postpone the foreclosure date – the date which you must be vacated from the property. I’m not suggesting you don’t make mortgage payments as there are moral and ethical lines that become blurred, but know if you fall on hard times a few (or many) months without a mortgage payment can help.
  • If something breaks or malfunctions, you don't have to fix it. When the foreclosure process starts, there is no need to fix any of those leaky faucets or batch the holes in the dry wall, as the lender is now responsible for the asset. I’m not suggesting you neglect or vandalize the property because the house is in foreclosure, but if you’re strapped for cash, know your options.
  • You can leave the home behind and simply walk away. Sometimes you need the collective weight of the mortgage payments, and deferred maintenance and repairs, to be lifted from your shoulders. When you know you can’t handle the property any longer, and you are willing to accept the negative consequences that come with a foreclosure, you can simply walk away from the property, which is exactly what millions of people did during the 2008 financial crisis.
• Cons
  • Damages credit. A foreclosure doesn’t come without serious consequences. The most important of which is the damage to your credit score. The exact amount a foreclosure affects your credit varies, most companies state at least 100 points and some sources claim as high as 300 points. In other words, you could go from an 800 to a 500 credit score solely from the foreclosure.
  • Limit future loan approval. Let alone is your credit wrecked but future loans will be more difficult to obtain. Lenders look at your mortgage as your highest and most important bill. Therefore, when you don’t pay your mortgage, it gives off the perception that you won’t pay other (and subsequent) loans. The foreclosure will stay on your credit for 5-7 years, with some Federal Housing Authority (FHA) loans allowing you to borrow again in a few years from the foreclosure date, assuming you have favorable payment history after the foreclosure.
  • Unknown time frame. Unfortunately, the time it takes from initial notice of the foreclosure to the date which you must be vacated from the property is uncertain. You can make partial payments or try a loan modification to postpone or prevent foreclosure. Some banks are more lenient than others, meaning they will be more willing to work with you to find a solution. The time-frame will also be dictated by how many foreclosures are on the lenders books. During the financial crisis there were millions of people in foreclosure, leading to the process taking as long as a couple years. On the flip side, foreclosures can happen in a few short months, so you can’t rely on having several months without mortgage payments.

Here are links to parts 1, 2, 3, 4, 5, 6 and 7 of our 8 part series. We hope this 8 part series has been helpful!