By Simon Volkov
Expert Author Simon Volkov
Real estate foreclosure occurs when borrowers default on loan payments. In addition to repossession of property, borrowers may also be held responsible for monetary deficiency when foreclosure property is sold for less than the amount due on the loan.
Real estate foreclosure has detrimental effects on borrowers' credit scores. Debtors often witness a decline of 100 points or more which generally places them into the high-risk category and can prevent them from obtaining credit of any kind for several years. If debtors can obtain credit they will have low credit limits and high interest rates.
Once banks repossess real estate the property is listed for sale through a foreclosure auction. If the property is sold for less than the balance owed on the original home loan, banks can obtain court ordered deficiency judgments for the difference. Deficiency amounts often equate to several thousand dollars and can take several years to repay.
Foreclosure remains on credit reports for 10 years, while deficiency judgments are reflected for up to 7 years after the debt has been repaid. Mortgage lenders can pursue collection of judgments by obtaining court approval for wage garnishment. Few people relish the thought of employer's knowing their personal business and employers frown on having to distribute payments to creditors.
Many people falsely believe that banks are unwilling to work with them to stop foreclosure. The truth is banks do not want to repossess real estate unless no other options exist. According to mortgage financier, Freddie Mac, the average cost of the foreclosure process is $60,000 or more per property. In addition to the expense of foreclosure, banks must manage real estate until it is sold.
In order to prevent real estate foreclosure, mortgagors must take action as soon as they realize they are unable to pay home loan payments on time. The sooner borrowers take action the more home-saving options are available.
Banks offer solutions based on mortgagors' financial status. If borrowers are able to get back on track within a short period of time, lenders might offer a loan deferment option which rolls one or more payments to the end of the loan and extends payment terms.
When borrowers experience short-term financial problems, banks can offer loan modifications or mortgage forbearance. Real estate forbearance agreements temporarily alter mortgage terms by reducing the rate of interest or the payment amount. Loan modifications permanently alter payment terms.
When borrowers can no longer afford to stay in their home, options exist which can reduce the financial consequences associated with foreclosure. The most common strategies include real estate short sales and deed in lieu of foreclosure.
Short selling requires borrowers to locate a qualified buyer to purchase their home for less than is owed on the mortgage note. When entering into real estate short sales it is important for borrowers to negotiate a payment in full agreement. This means banks accept the discounted sale price as payment in full toward the outstanding loan. Without payment in full, borrowers can be held responsible for the deficiency amount between the purchase price and loan balance.
Banks typically offer deed in lieu of foreclosure as a last resort. Using deed in lieu, borrowers return their house to the lender. Just as with short sales, borrowers can be held responsible for deficiency amounts. If banks are unwilling to accept the property as payment in full, borrowers may want to retain the services of a real estate attorney to negotiate the contract.
Discover additional real estate foreclosure strategies from author and real estate investor, Simon Volkov. His website includes a comprehensive foreclosure prevention article library which offers information and resources to help borrowers make informed decisions available at www.SimonVolkov.com.
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