Foreclosure Alternatives

Unfortunately, over the past few years in particular, many homeowners have had to deal with the always-dreaded “F” word – Foreclosure. This is a very difficult time for anyone, as it involves having to lose the asset you have worked so hard to get. While foreclosure is the only way that a lender can force a homeowner to lose their home, many options exist for the homeowner to try and avoid the loss, or to at least make the loss less invasive. Here is a brief summary of the main options available to homeowners to try to avoid foreclosure. It is important to note that this list assumes that the value of the home is less than the amount in loans against the property. If the value exceeds the loans, the homeowner can sell their property the standard way, and use the proceeds to pay the loans.

The most common avenue available to homeowners, which results in the homeowner remaining in their home, is a loan modification. At its essence, a loan modification involves changes to the terms of the loan, to make it easier for the borrower to keep up with payments. It is important to remember, however, that despite the incentives lenders receive for agreeing to loan modifications under certain programs (HAMP, etc.), a lender is not required to agree to modify a loan. At the end of the day, the decision is a business one, and is up to the lender. While there are companies out there that will help you work with the lender on a loan modification, homeowners should be wary of companies that require up-front fees for this service, as this is strictly forbidden.

If a loan modification is not an option, and the homeowner must choose an option, which does not result in the homeowner remaining in their home, an option, which has been prominent of late, is a short sale. A short sale is when the value of the property is less than the amount of loans against it, a third party purchases it for market value, and the lender waives the remaining balance. In other words, the lender(s) accepts less than it is owed. This option may be desirable, as it does not involve the legal process of going through foreclosure, and feels more like a sale of the property. However, short sales still can have certain tax and credit issues, so it is important to speak with a legal and/or tax professional about these consequences before deciding to pursue this avenue.

Another option, which is less prominent but still one to consider, is called a “Deed-in-Lieu.” When a lender forecloses on a property, they ultimately sell the property at auction and “purchase” the property either themselves (using the money they are owed on the loan) or have it sold to a third party. With a Deed-in-Lieu, the homeowner transfers the property to the lender, and the lender foregoes its rights to foreclose. Essentially, the homeowner signs a deed in lieu of going through foreclosure. While a Deed-in-Lieu can be a desirable option, it is important to engage a legal professional to ensure that your rights are being appropriately protected in this transaction.

Foreclosure is a tough process that some homeowners ultimately have to endure. The options discussed above can help make that process a little easier to bear. However, once a lender initiates foreclosure proceedings (either by filing a Notice of Default or by filing a lawsuit against the homeowner), the clock begins to tick, and it is imperative that the homeowner contact appropriate professionals, so that the homeowner can adequately assess its options.

Steve S. from Encino, CA is a member of the Attorney Referral Service of the San Fernando Valley Bar Association.

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