Posts Tagged ‘Foreclosure’

Foreclosure and Two Ways to Avoid Going Through It

Tuesday, October 21st, 2008

Foreclosure means that a borrower can not make the required principal and/or interest payments on a loan secured by an interest in property.  Because of the borrower’s default, the lender has a right to terminate the borrower’s interest in the property.  The procedures vary from state to state, but the end result is that the lender either can take ownership of the property or sell it and the borrower’s equitable or statutory right to redeem the property is barred forever.

Approximately 95% of all residential mortgages in the United States are being paid on time.  That means that there are problems with about 5% of mortgage loans.  If mortgagors (e.g., the homeowners / borrowers) do not pay their mortgage loans, they will lose their homes.

Two other options exist for those facing foreclosure.  First, the borrower can offer a deed in lieu of foreclosure.  This means that instead of waiting for the foreclosure process to occur, the lender consents to accepting the borrower’s property interest immediately.  If the value of the property is below the remaining mortgage debt, the lender usually agrees to forgive the difference.

The second option is known as a “short sale.”  In this case, the borrower sells the property for less than the remaining mortgage debt.  The lender’s consent is required and, as in a deed in lieu situation, the lender usually agrees to forgive the excess owed on the debt.

In both options, the homeowners lose their homes.  Yet, this still can be preferable than going through foreclosure.  First, it takes less time, so the home owner who knows there is no way he can keep his home can shorten the process and the pain.  Second, the home owner also will no longer be legally obligated to pay the debt.  Third, if a foreclosure occurs and the home is later sold for less than the amount owed on the debt, some states allow a lender to pursue the unpaid amount.  However, with deed in lieu or a short sale, the lender almost always consents to forgive any remaining debt.