Foreclosure: 101

What is a foreclosure and how do I stop it?

A foreclosure is the process where the lien holder (usually the mortgage company or tax entity) is attempting to collect a debt by exercising their lien against your property.  


Over 100 foreclosures happen in Austin every month, thousands in Texas, and hundreds of thousand across the country.  While a foreclosure is a scary situation that most people only have to deal with once in their life, we deal with hundreds per year.  You are not alone it just takes ACTION on your part to prevent the foreclosure process by reaching out to the experts to guide you along the way.   

What happens if I get foreclosed on?

A foreclosure is called the 10 Year Nightmare for a reason; 

  • First, the bank will have you forcibly removed from the home.  This often involves the Sheriff's deputies escorting you and your belongings to the curbside.  Where you go and what you do from there is not there concern so long as you have vacated the house after the foreclosure date.   
  • Second, your credit is ruined for the next 7-10 years.  No more: 
    • credit cards 
    • normal bank accounts 
    • cell phones 
    • regular auto Insurance
    • getting approved for student loans for your children
    • buying cars with credit, renting/buying a home 
    • even some jobs that require a credit check 
    • anything that requires credit will be off-limits to you.  
  • Next, your wages could be garnished for the full value of the loan and creditors will be calling day and night to collect the debt.  
  • Lastly, the IRS can come after you for any unpaid taxes against the house.  

How to AVOID foreclosure

There are several basic ways to avoid being foreclosed on once the process is put into place.  

  1. Reinstate the loan 
  2. Loan Modification 
  3. Repayment Plan
  4. Forebearance 
  5. Sell your home 
  6. TAKE ACTION TODAY!!!

Reinstate the loan

All the banks want is the money it takes to bring the loan current.  It is in their best interest and your best interest to keep the loan current and NOT foreclose.  Here are some of the options available to you to do this while working with the bank:

  • Refinance:  The mortgage company may be willing to refinance the home and use the equity to bring the note current
  • Partial Claim:  For FHA loans, special loans may be available to help you catch up your delinquent amount.  
  • Other sources:  In my experience, people have found creative ways to find the money needed to reinstate the loan.  While I cannot promote or advise certain actions that could put you in a worse situation, I will say that I DO NOT recommend borrowing against your retirement, I DO NOT recommend borrowing from high interest rate lenders, I DO NOT recommend borrowing from family/friends if you cannot truly pay them back, and I DO NOT recommend selling other assets just to reinstate a loan if you cannot make the mortgage payments going forward.  

Loan modification

A loan modification is a permanent restructuring of the terms of the loan to help make the loan more affordable.  This can be done by a variety of ways to include but not all-inclusive: 

  • changing interest rates/types 
  • extending the length of the loan and/or a 
  • reduction of the interest rate  

Loan mods can take time, typically a 2-4 weeks before they are either approved or denied.  If you have limited time before the foreclosure auction, always make sure you have a back-up plan in place. In my experience; 

  • Often approved less than 30% of the time
  • Often don't get final notification of the approval/denial process until right before the foreclosure auction.  This can prevent other options form working if the loan mod denial happens within 5 days or  less than prior to the auction. 
  • May not provide enough relief going forward to prevent another potential default on the loan

Repayment Plan

Although rare, a lender/mortgage servicer may be willing to accept a repayment plan for the delinquent amount.  This can be spread out over future payments or as additional payments.  

This option typically must be done early in the delinquency period.  The longer the homeowner goes without making a monthly payment, the less likely it will be to get a repayment plan.  Most banks will see the lack of ability to pay or attempt to prevent the delinquency from getting worse as a red-flag not to accept a repayment plan. 

Prevent Foreclosure! Stop Foreclosure!

Sell Your Home

If you are not able to reinstate the loan and after doing a budget analysis, cannot afford to stay in the home going forward, selling your home is your best option.  There are several ways to do so and each one is dependent on time, reinstatement fee, condition of the home, and ultimately finding a buyer.  

  • Short sale:  A mortgage servicer MAY be willing to accept less than the balance due on the house in certain situations.  Short sales take time with lots of paperwork and often require a motivated buyer.  This option, if it works for your situation, can prevent a foreclosure and is less harmful to your credit.  It is not an easy route to take and will not work for a majority of homes with a pending foreclosure but is one option to at least explore.
  • Deed in Lieu:  This is essentially selling the house to the lender or signing the deed over to the lender to prevent the foreclosure.  A lender must agree to a Deed in Lieu of Foreclosure and typically will look at the potential equity to evaluate if it is an agreeable option.  You as the homeowner, avoid foreclosure but walk away with absolutely nothing.  Any equity in the house goes to the bank when they decide to sell.  
  • Retail:  Homeowner(s) sell a home with a realtor and have it listed on the MLS.  Selling a home retail takes time and money.  Even if you find a buyer within a few days of listing, sale to closing process can take upwards of 30-45 days.  Getting a home ready to sell takes money.  Nobody wants to buy a house that isn't up to the same standard as the homes around it or needs extensive repair.  Agents aren't cheap, an agents commission can be 3-6% of a homes sale price.  Seller's are often responsible for closing costs, you want to sell, you gotta pay for it.  
  • Cash buyer/Investor:  If you need to sell fast, typically less than 14 days and cannot afford to sell your home on the retail market, then a cash buyer/investor is your best bet.  Real Estate Investor's (REI's) are often able to make an offer and close on your house in 14 days or less and can help you to realize some of the equity in your house when you sell.  There are many factors that can effect the equity in the house, the biggest are;
    • Repair/Remodel (R/R) costs.  Whats does it cost to get your house ready for sale on the retail market? 
    • Holding to Closing costs.  It will cost an investor a certain dollar amount to hold the home during the R/R phase, everyday the investor holds on to the home and cannot sell adds to the H-C costs.  Closing on a home, the REI will have to pay the realtor that lists the house their commission as well as all closings costs with the sale and any other third parties involved with the sale.
    • Current Market Trends.  Homes values can rise and fall like the tides and can be seasonal.  Tax appraised values are not the same as retail values.  Selling a home based on current market trends always involves a gamble that you'll get what you need upon the sale of the home.  
    • Profit.  All REI's are going to want to make some profit off the sale of the home otherwise they would not be spending their time investing in your home.  Profit margins can vary per investor and per deal and there is no steadfast rule of thumb for how much an investor is willing to take as profit.  Typically the more time it takes and the greater the risk involved with the home, the higher the expected profit margin will be.  


Forbearance

This is an agreement made between the homeowner and the mortgage company to temporarily suspend payments and allow you to make up the shortfall.  This requires the lenders approval and needs to be implemented early on in the delinquency/foreclosure process.  The key here is immediate, consistent, and open communication with the mortgage company.  

Bankruptcy and Foreclosure

Thinking of filing for Chapter 7 Bankruptcy to stop a foreclosure?  

This option will provide TEMPORARY relief from the pending foreclosure but will not eliminate it all together.  A mortgage is a SECURED debt, meaning filing for bankruptcy to avoid foreclosure doesn't eliminate the money owed the bank and doesn't stop the foreclosure.  At any time the court can order the temporary relief from the bankruptcy removed and the foreclosure proceedings go forward like normal.  

Thinking about filing a Chapter 13 bankruptcy to avoid a foreclosure?  While this will allow you to restructure your debt and allow you to keep your home, it is dependent upon getting approval which is harder than just filing the paperwork and not always approved if you don't meet the requirements for a Chapter 13.  On top of it all, you have additional court costs and lawyer fees to pay out.  

Steps to take

  1. The first and most important step to take is contact your mortgage servicer or bank handling the loan.  
  2. Go over the options available to you with the mortgage servicer/bank and see what options they have available to you.  
  3. Depending on the strategy your bank suggests, always get a back up cash offer!  The benefits of getting a cash offer back-up plan:
    1. Most cash investors can have a contract to purchase wrote up and ready in a few days.
    2. If all other options fail with the banks, you will already have a contract to sell and avoid foreclosure!
    3. There is no obligation and no costs to have a cash offer contract wrote up and in place with an REI! 

FAQs

Q: What happens if my home goes to the foreclosure auction? 

A: If you are not able to work out a deal with the bank, reinstate the loan or sell the home, your home will go to the county auction held on the first Tuesday of the month regardless of weather or holidays.  From there, homes will be placed on the auction block one by one to the highest bidder.  The bank will have a minimum bid in place to ensure it recoups the balance owed on the house. 


Q: What if my house goes to the auction block but does not get bid on? 

A: Homes that go to auction and are put up on the block but are not bid on, are foreclosed on and assumed by the bank.  The home is now a bank owned property per the mortgage agreement to satisfy the debt.  The bank will then attempt to sell at a later date on the retail market


Q: What happens if my home doesn't go up on the auction block on the scheduled auction date? 

A: Any home that is scheduled for auction but does not make it to the auction block, will be rolled over to the next month.  Not going up on the block will not prevent the foreclosure, just prolong the process, incur more fees and make it harder to negotiate a deal with the bank. 


Q: Can I bid on my own house at the auction? 

A: No, once the house goes up for auction, you are not allowed to bid on your own home and are not allowed to have anyone bid on your behalf.  


Q: If I sign a contract to sell and get my loan modification or reinstatement done, do I still have to sell you my home? 

A: No, if you are able to avoid the foreclosure by reinstatement, loan modification, forebearance, or payment plan but have a contract to sell with us in place, you DO NOT have to sell.  Many homeowners still do want to sell and find a place that is more affordable but that is dependent on you the homeowner. 


Q:  What happens if I decided to sell to you?  

A:  If you agree to sell, we will negotiate the terms of that sale that are in your best interest.  We will go over all steps in the process and the different strategies we can apply to purchase your home and avoid the foreclosure.  This will often give you more time in the house and help you realize the equity you have built up in the house when you sell.