Falling Behind Mortgage Payments
A borrower facing foreclosure should not simply walk away from the property. The lender might agree to modify the loan. Often, the lender’s first notice to the defaulting borrower includes information about possible modification or repayment arrangements. That is why it is important for the borrower who stopped making mortgage payments to still open mail from the lender. In the past, it was difficult to get lenders to make many concessions with borrowers who got behind on their mortgages, but in this sluggish real estate economy, lenders are more willing to bargain. The lender might recover very little for the property or have to hold onto it for a long time, costing money for taxes, upkeep, and insurance.
A Short Sale
Sometimes the lender will agree to a short sale. This is a sale of the property for less than the mortgage amount, after which the lender forgives any loan balance not covered by the sale price. Lenders will agree to this arrangement because it saves them the cost of selling the property and maintaining it until it is sold. Borrowers benefit because they avoid a deficiency judgment. This will not usually work if the borrower has a second mortgage, but even then, it’s worth asking the lender to agree to a short sale.
A Deed in lieu of Foreclosure
The borrower might consider signing over the deed to the lender. The lender saves the cost of foreclosing on the property. The borrower avoids a deficiency judgment.
Impact on Your Credit Rating
Sometimes borrowers wonder if a deed in lieu of foreclosure or a short sale will affect their credit score differently from a foreclosure. For most purposes, all methods have similar effects on the defaulting borrower’s credit. However, choosing an option other than foreclosure ends the process sooner. This may offer you an advantage later, because over time the credit score will get better assuming the foreclosure is the last negative entry.