The years 2007 to 2012 were pretty rough for homeowners across the nation. Boulder County didn’t suffer nearly as much as other markets, such as Las Vegas and Phoenix, where homes lost a considerable amount of value. Boulder County has experienced a strong real estate market since 2012 and is still showing considerable strength. If the market is so strong, then why write an article about foreclosure? Over the years, I have found that even in good markets, it’s always best to be prepared for any circumstance. People lose jobs, experience health issues, and for a variety of reasons can’t make their house payments. When a homeowner gets behind in their payments, they usually don’t know what to do — so they do nothing. In fact, in the last recession, over 70% of homeowners did just that — absolutely nothing — and walked away from their homes. In reality, there are several options, and foreclosure should be the very last one.
Credit and homeownership can often be rescued if the homeowner takes quick action. At the first sign of not being able to make the monthly mortgage payment, the homeowner should start out with contacting a real estate attorney, a Realtor®, and their mortgage lender to review all the options summarized below:
- Repayment plan (also known as Forbearance)
- Sell the Property
- Rent the Property
- Modification of the Mortgage
- Short Refinance
- Reverse Mortgage
- Deed In Lieu of Foreclosure
- FHA and VA options
- Service Members Civil Relief Act (SCRA)
- Short Sale
Often the reason a homeowner is behind on payments is only temporary. The homeowner has to pay all of the missed payments, any late fees, and attorney fees in a lump sum payment. After the homeowner is caught up with this combined total, the loan continues as it was before.
Repayment plan or forbearance
Sometimes the lender will take the missed payments, any late fees, and attorney fees, and divide them up over a payment plan or add the payments onto the end of the loan. The homeowner will usually need to show the lender why they would now be able to handle the repayment plan suggested by the lender. Forbearance was a real buzz word during the COVID-19 pandemic. In many cases, homeowners were allowed to skip payments, but several found out it hurt their credit rating.
Sell the property
The sooner a distressed homeowner calls their Realtor, the better. Each month that goes by without making a payment — before getting the home on the market — makes it tougher to solve the problem. The more equity a buyer has in their home, the more likely they will be able to sell the property and pay off the mortgage, and maybe even have something left over. Some lenders may postpone foreclosure if they know the property is on the market or a contract is pending.
Rent the property
The homeowner has to live somewhere; however, if the homeowner can rent a different place for less while renting out their current home, close to the total mortgage principal, interest, taxes and insurance payment, this could be a viable alternative. When the situation stabilizes, the homeowner can move back into their original home.
Usually when a homeowner is behind on payments and doesn’t have a job, it is tough to get a new loan. However, if there is enough equity, the credit has not been damaged too badly, and the problem that caused the late payments has gone away, then there is a chance a new lender will make a loan.
Modification of the mortgage
A lender may agree to a variety of modifications. Those modifications might include lowering the interest rate, extending the term of the loan, or adding the missed payments to the end of the loan.
A short refinance can involve a reduction of the principal amount and possibly even a lower interest rate. Usually the borrower still needs to show not only hardship, but also the ability to pay the mortgage with the new payment structure.
If the homeowner is over the age of 62 years old, a reverse mortgage could pay off the existing mortgage and the homeowner could have no payments. If there is enough equity in the home, they might even be able to receive payments.
Deed in lieu of foreclosure
This usually works best when the home value is about the same as the mortgage amount. It is often called the “friendly foreclosure” since the borrower simply deeds the property back to the lender. Generally, this only works if there is just one mortgage and no other liens. In the settlement, sometimes the lender will forego any rights to a deficiency judgment.
Sometimes a bankruptcy will stop a foreclosure and allow the borrower to reorganize their debt and keep their property. By entering bankruptcy, it can make the property more difficult to sell or to negotiate a short sale. Personal bankruptcy is generally considered a last resort.
FHA and VA alternatives
If a homeowner has an FHA or VA mortgage, there might be other alternatives. More information can be found at fha.gov orhomeloans.va.gov.
Service Members Civil Relief Act (SCRA)
When a homeowner is called to military service and can show that call to duty has an effect on their ability to pay – and the mortgage was placed before the active service – there can be relief.
A short sale occurs when the loan on the property is greater than the value of the property. When an offer comes in on the property, the lender must approve the amount of the short fall. Oftentimes there are so many investors involved in making the decision on the short fall, it can take an extraordinary amount of time to get the final approval.
Foreclosure finally comes about when the lender has filed the necessary paperwork and has served the Notice of Election and Demand. In Colorado, a sale date is then set 110 to 125 days from the NED recording date. After the sale date, there is no redemption period, and the homeowner no longer has any rights to the property.
Quick action and contacting the appropriate professionals are the key ingredients to successfully dealing with a possible foreclosure situation.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.