Pre-foreclosure begins when the lender files a default notice on the property due to the homeowner not paying their mortgage anywhere from a couple of weeks to a whole year.
In turn, this violates the non-payment terms in the original mortgage agreement with the lender and ultimately puts you on the long and arduous path toward full foreclosure.
While pulling yourself out of pre-foreclosure can most definitely be a difficult journey, it is by no means an impossible feat.
In fact, it’s the best time for you to rework your mortgage details and find solutions to potentially save your home and alleviate debt.
If you find yourself in the middle of a preforeclosure process or even nearing the possibility of pre-foreclosure, here are few techniques that could help you avoid the worst-case scenario.
1. Try loan modification.
A loan modification is changing the terms of your mortgage while staying with the same lender.
This could be carried out in a number of different ways, but the most common is extending the length of time for repayment. Let’s say your original agreement was to pay off your $300k mortgage loan in 15 years at around $1,600 a month.
If this somehow becomes unaffordable for you for any reason, your lender may let you extend the amount of time on your loan. So instead of $1600 a month, you would modify it to $1000 a month with the promise of paying off your loan in 25 years.
You could also choose to reduce your interest rate or opt for a different kind of loan. The modification you choose depends on what makes the most sense for your current financial state, as well as what your lender is willing to offer you.
2. Pay past-due balance and late fees.
Before you begin looking at the other options, simply try paying your past-due balance and late fees.
This should actually be the first thing you attempt to do because not only will it immediately stop the preforeclosure process in its tracks, it’ll keep your original loan agreement intact which may be beneficial if it’s the best agreement a lender can make with you.
While some lenders will want you to pay your past due balance and late fees as a lump sum, others will allow affordable payment arrangements that can be simultaneously paid off with your regular monthly payments.
Because this option requires you to shell out more money in the short-term, it’s most suitable if you have temporarily lost income and have regained it or missed less than three of your regular payments.
3. Consider a short sale.
A short sale is when your bank or lender approves the sale of your home for less than the amount due on the mortgage.
This gives you the opportunity to give the lender a portion of the mortgage loan that is owed to them via sales when paying it in full or settling past-due balances is no longer a viable option.
The upside of this technique is that it does less damage to your credit score than allowing your home to be foreclosed and also frees you from the responsibility of paying home sale fees.
However, all profit from the sale of the house goes to your bank or lender which means that you don’t get any of the proceeds.
This is the best option if you’re backed into a corner and just looking to alleviate your personal debt. Yes, it does leave you with a sold home and no money from the sale to put toward purchasing a new one.
However, it gives you a cleaner slate than a foreclosure would give you.
4. Look into refinancing.
Refinancing is similar to loan modification in the sense that it allows you to change the amount of your monthly payment as well as the length of your loan.
However, refinancing often means that you will be doing business with a different bank or lender. Your new lender will most likely offer you a more affordable monthly payment, a different loan type, or a lower interest rate if your current lender cannot do so.
However, it’s important to note that refinancing is truly only a good option if you’re not underwater on your loan, meaning that you don’t owe more than what your property is worth.
It is also a great idea if you need to take money out of your home equity in order to pay for other bills—this is something that isn’t allowed with a loan modification.
5. See if bankruptcy is a viable option for you.
Filing for bankruptcy is one way to stop pre-foreclosure proceedings and work out a more affordable repayment plan, all while staying in your home.
A chapter 13 bankruptcy helps you develop a plan to repay all of your current debt associated with the home, while chapter 7 bankruptcy allows you to go with a payment plan or simply give up the home and stop the bank from collecting money from you any further.
Chapter 13 is the best way to go if you feel that you can eventually catch up on your debt and go back to your regular payments; Chapter 7 is helpful for those of you who simply want to cut your losses and move forward.
Are you experiencing Pre-foreclosure? Contact us, we can help.