This is a question we get a lot – foreclosure it's rarely right for anyone, however there are exceptions.
Generally speaking, we usually advise people to attempt a loan mod and/or short sale, before allowing the foreclosure process to proceed – if for no other reason, to give themselves the ability to at least say they tried something other than walking away.
In the case of short sales, there is an amount left over (the deficiency) between the amount you owe and what you actually sell the property for. Should the bank choose to foreclose, they reserve the right in many states to pursue the borrower for the deficiency. In states where lenders cannot pursue, they can still ruin your credit simply by foreclosing. In both instances a short sale will lessen the damage to your credit, however in states where lenders reserve the right to pursue, a short sale could see that deficiency significantly reduced – or even waived completely.
What the lender decides is largely based on you – your hardship, income and current assets.
Keep in mind though, the bank has no legal obligation to work with you – they'll consider your application for a loan mod or short sale, because it's often in their best business interest to do so. Since there are no "rules" so to speak (in most instances) on how much of the deficiency they can ask for, they (attempt) to base what they ask of you on how much you currently have, how much you make and how collectible you might be.
Foreclosure is not cheap for a bank. Between legal fees, taxes, homeowner association dues, maintenance/upkeep, etc., your lender can spend upwards of $50k on the process. Further, they aren't likely to receive an offer on the property as high as the one you'd bring them. If they feel the cost to pursue will be greater than the amount they stand to make on the short sale, the chance of approval is good.
If the lender feels that a person is collectable, they still might be willing to consider a short sale, but they're more likely to ask for something in return. The better your situation, the more they're willing to ask for. The worse your situation, the less your lender is likely to seek.
That said, there are two people where foreclosure is a better option:
Concerning the former, you simply cannot give what you don't have. If your lender requests more than you have and won't consider your hardship, etc., there isn't much more you can do. However, there is a silver lining – in most states, you can live rent-free for at least four months once your last payment is made, giving you a little time to set aside funds for a new home or apartment.
Some states offer a redemption period, adding extra time after the four-month foreclosure process to redeem the property – you can't be evicted until the redemption period has expired. Here in Michigan, the redemption period is 6 months; giving you a minimum of 10 months after your last mortgage payment has been received to live for free in your home and save money. Often, with lenders grossly overwhelmed, it can go even longer. We regularly hear about people STILL in their homes after going 2 years without making a mortgage payment. That's a lot of time to save money.
As for those who have the money and don't want to make a contribution towards the closing, it'll be difficult to convince a bank to take a loss while you walk away, simply because you're "tired of throwing good money at bad." For the record, I don't necessarily disagree with this stance – sometimes you simply have to cut your losses and move on – but that really only leaves foreclosure as an option.
An infographic I came across at deadlinenews.com does a decent job of illustrating when a foreclosure might be right for you – though, I would caution using foreclosure as "leverage" to negotiate with your lender. More times than not, going delinquent is enough.
Most importantly, remember that as long as you're realistic about your situation, foreclosure should always be your last option…
Generally speaking, we usually advise people to attempt a loan mod and/or short sale, before allowing the foreclosure process to proceed – if for no other reason, to give themselves the ability to at least say they tried something other than walking away.
In the case of short sales, there is an amount left over (the deficiency) between the amount you owe and what you actually sell the property for. Should the bank choose to foreclose, they reserve the right in many states to pursue the borrower for the deficiency. In states where lenders cannot pursue, they can still ruin your credit simply by foreclosing. In both instances a short sale will lessen the damage to your credit, however in states where lenders reserve the right to pursue, a short sale could see that deficiency significantly reduced – or even waived completely.
What the lender decides is largely based on you – your hardship, income and current assets.
Keep in mind though, the bank has no legal obligation to work with you – they'll consider your application for a loan mod or short sale, because it's often in their best business interest to do so. Since there are no "rules" so to speak (in most instances) on how much of the deficiency they can ask for, they (attempt) to base what they ask of you on how much you currently have, how much you make and how collectible you might be.
Foreclosure is not cheap for a bank. Between legal fees, taxes, homeowner association dues, maintenance/upkeep, etc., your lender can spend upwards of $50k on the process. Further, they aren't likely to receive an offer on the property as high as the one you'd bring them. If they feel the cost to pursue will be greater than the amount they stand to make on the short sale, the chance of approval is good.
If the lender feels that a person is collectable, they still might be willing to consider a short sale, but they're more likely to ask for something in return. The better your situation, the more they're willing to ask for. The worse your situation, the less your lender is likely to seek.
That said, there are two people where foreclosure is a better option:
- Those who don't have the amount their lender is requesting
- Those who do but aren't willing to spend anything.
Concerning the former, you simply cannot give what you don't have. If your lender requests more than you have and won't consider your hardship, etc., there isn't much more you can do. However, there is a silver lining – in most states, you can live rent-free for at least four months once your last payment is made, giving you a little time to set aside funds for a new home or apartment.
Some states offer a redemption period, adding extra time after the four-month foreclosure process to redeem the property – you can't be evicted until the redemption period has expired. Here in Michigan, the redemption period is 6 months; giving you a minimum of 10 months after your last mortgage payment has been received to live for free in your home and save money. Often, with lenders grossly overwhelmed, it can go even longer. We regularly hear about people STILL in their homes after going 2 years without making a mortgage payment. That's a lot of time to save money.
As for those who have the money and don't want to make a contribution towards the closing, it'll be difficult to convince a bank to take a loss while you walk away, simply because you're "tired of throwing good money at bad." For the record, I don't necessarily disagree with this stance – sometimes you simply have to cut your losses and move on – but that really only leaves foreclosure as an option.
An infographic I came across at deadlinenews.com does a decent job of illustrating when a foreclosure might be right for you – though, I would caution using foreclosure as "leverage" to negotiate with your lender. More times than not, going delinquent is enough.
Most importantly, remember that as long as you're realistic about your situation, foreclosure should always be your last option…