What Foreclosure Alternatives are Available?

Foreclosure alternatives used to be few and far between for struggling homeowners, but this is no longer the case. Lenders are now far more prepared to listen prior to undertaking an involved legal process to take possession of a property. There are a number of ways to stop home foreclosure, including filing for bankruptcy, loan modification or a short sale.

Arrange a Short Sale on the Open Market

A short sale is the most common foreclosure alternative. Subject to the lenders permission, it is possible to sell a property on the open market for less than the mortgage and loans secured on it.

Example: A short sale takes place for $260,000 on a property with a $300,000 mortgage secured on it. The remaining $40,000 is written-off.

The lender is agreeable to this because it is a foreclosure alternative that allows them to get fair market value for a property and avoid an involved legal process.

If a debt shows on a credit report as "settled for less than the full amount due" the effect on your FICO score will be the same as foreclosure. However, if it shows as "settled in full" your credit score won't deteriorate any further. Ask your lender which of these options will show before proceeding.

Whilst the write-off of debt is normally treated by the IRS as a 'cancellation of indebtedness income' and is taxable, this is not currently the case. Provided that a short sale takes place between now and 2012, no taxation will become payable.

Loan Modification

The Making Home Affordable (MHA) plan was introduced by the Obama administration on the 4 March, 2009 as one of several viable foreclosure alternatives. The intention is to stop home foreclosure by making a series of adjustments to a mortgage agreement in order to improve affordability. A loan modification may include any of the following amendments:

- A reduction in the principal.
- A reduction in the rate of interest.
- An extension of the term of the loan.
- A change in the loan type. For example, changing to an interest-only mortgage.

The objective is to reduce repayments to 38% of the borrowers income. The government then provides further assistance to reduce payment to just 31%. This lower debt-to-income ratio increases the probability of a homeowner being in a position to keep-up their monthly mortgage repayments.

Filing for Bankruptcy

Insolvency may not appear to be the most likely of foreclosure alternatives as it implies giving up all your possessions, but this needn't be the case. However, only non-exempt assets (stocks and shares, a luxury car etc) need be handed over to a trustee to be sold under chapter 7.

Filing for bankruptcy will mean that repossession proceedings will be ceased forthwith and full court protection from creditors provided. The majority of homeowners also have unsecured debt. Writing-off credit card debt will lower your debt-to-income ratio, leaving more money available to pay the mortgage.

Foreclosure alternatives are available for homeowners who are unable to make their mortgage repayments each month. Discuss filing for bankruptcy, a short sale and the possibility of a loan modification with a credit counselor as soon as you suspect that it may become difficult to pay the mortgage.

Relevant Articles:
Advantages and Disadvantages of a Mortgage Modification
How the Mortgage Foreclosure Process Works




Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.