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What are the most common alternatives to foreclosure?

by Dorota Trzeciecka on August 25th, 2011

There are several options that borrowers have as alternatives to foreclosure.

  1. First step in avoiding foreclosure should always be a request for loan modification.  If you’re successful at loan modification, you will be able to put a stop to foreclosure and to keep your home, if that is your goal.
  2. If you are in foreclosure, and you no longer wish to keep your home, you should consider making a request for a short sale.  In a short sale, the servicer will allow you to list and sell the mortgaged property with the understanding that the proceeds from the sale may be less than the total amount due on the first mortgage.  The difference between what you owe on your mortgage,  and the short sale proceeds,  is referred to as deficiency.   The main benefit of short sale is a potential for a deficiency waiver.  You stand a better chance having the deficiency waived in short sale than in foreclosure.  That’s because, in general, short sale will bring a better price for the property than foreclosure will.  In my experience, the loan servicer will rarely commit to the waiver of deficiency at the beginning of the short sale process.  The lender will first want to know what the offer is going to be and what junior liens on the property can be negotiated for lower amounts.   Once the lender has the offer in hand and the information about junior liens, it can better determine the amount of deficiency, and get back to you with the answer about the waiver.  In any case, at the end of the short sale process, you always want to get clarification from the lender about whether or not they’re going to seek a deficiency judgment, so that you can take steps to protect yourself, if necessary.
  3. And finally, many homeowners’ dream alternative, especially if their property is under water, is to be able to walk away from the property, with no liability.  This is almost never a first step in the foreclosure process.   In general, if the borrower makes a good faith effort to sell the property but is not successful, the loan servicer may consider a deed in lieu of foreclosure (or DIL).  With a DIL, you voluntarily transfer the property to the loan servicer, provided that there are no other mortgages, liens and encumbrances on the property.   If the lender agrees to accept the deed in lieu, you will walk away from the property with no further personal liability for the balance of the mortgage.

From → Foreclosure