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Foreclosure Alternatives – Options for Homeowners to Avoid Foreclosure
Given the rough economy, many people can’t keep up with mortgage payments and face the possibility of losing their homes. They should know that there are foreclosure alternatives, including the advice of HUD counselors, short sales, and deeds in lieu of foreclosure. Before incurring the financial and emotional toll of a foreclosure, they should explore all the advice and options available.
Anyone who has received a notice from their lender about their mortgage payments should arm themselves with as much information as possible. Don’t ignore the letters sent by lenders; they often contain information on the lender’s own foreclosure alternatives. In addition to help offered by lenders, the U.S. Department of Housing and Urban Development (HUD) provides low-cost or free housing counseling. HUD counselors help homeowners understand their rights and options, can help reorganize finances, and may even represent homeowners in negotiations with lenders. Each state has its own housing laws and regulations, so contacting a local HUD counselor can be a good way for homeowners to get relevant, individualized advice. It’s better for homeowners to begin looking at options early on, before it’s too late to make changes that can help.
Short sales are a common option for homeowners facing foreclosure. In a short sale, the house is sold for less than the mortgage amount. Typically, the lender then forgives the remaining balance of the loan. This arrangement allows homeowners to get out of the situation without utter financial ruin while the bank gets a partial return on the loan. It’s not ideal, but it’s an option for some. Unfortunately, short sales aren’t available to everyone; lenders generally won’t allow them if homeowners have a second mortgage. Many lenders require that buyers try a short sale before attempting other foreclosure alternatives, like deeds in lieu of foreclosure.
Deeds in Lieu of Foreclosure
A deed in lieu of foreclosure is an arrangement between the homeowner and the lender whereby the homeowner turns over the deed of the house to the bank in exchange for a promise that the bank won’t foreclose. During a foreclosure, the bank takes control of the house and evicts the former owners. In deeds in lieu of foreclosure, homeowners can generally stay in the home for a short while. CitiMortgage is testing a new program that offers deeds in lieu of foreclosure in several states; their agreements allow homeowners to stay in the homes for 6 months and offers $1,000 relocation assistance if the homes are left in good condition. The process is better for lenders because it keeps legal costs down; it’s also better for the former homeowners because it doesn’t hit their credit score as hard.
Fannie Mae, the government-run mortgage company, has similar programs. In its "Deed for Lease" program, a homeowner transfers the deed to Fannie Mae and signs a one-year lease to rent the house at market rates. Month-to-month extensions are available after the year term. Fannie Mae also has a deed in lieu of foreclosure program where homeowners transfer the deed and then walk away.
While some arrangements release the former homeowners from the obligation to repay the loan, in some states lenders retain the right to collect after a foreclosure, deed in lieu of foreclosure, or short sale. That’s why it’s important for homeowners to seek advice of HUD counselors or lawyers before making a decision. It’s a tough situation with lasting consequences, so it’s not one to ignore or take lightly. With such foreclosure alternatives out there to help, homeowners having trouble with their mortgages should take advantage of every resource available to them.
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