Foreclosure or Bankruptcy
Now Might Be the Best Time Ever to Try to Work out a Mortgage
Banks are more willing than ever to work with buyers. Additionally, the government has been working on a variety of borrower centered plans. Learn how to keep a home.
More than ever borrowers have to choose between foreclosure, bankruptcy, or struggling to subsist in a home that may be worth less than the mortgage underneath it. As more buyers have to make tough choices, it is important to understand what each choice means for the future and what the best choice for a particular situation is.
Bankruptcy
By far the worse possible choice a borrower will ever have to face, declaring bankruptcy leaves credit scarred for seven years (or more) and removes the possibility of obtaining any credit for that period of time. Since bankruptcy laws have changed in the past year, declaring bankruptcy no longer means freedom from all debt. Now filers have to work out a payment plan that might result in them paying less than they actually owe, but will certainly result in them paying something. Worse yet, the payments will be garnished, coming directly out of the filer’s paycheck. This option should not be considered if a borrower is only having trouble paying the mortgage, but has enough to pay the rest of his/her bills. Avoid this option at all cost.
Foreclosure
Obviously not optimal, but far less damning then declaring bankruptcy, foreclosure has a minimum effect of two years on the credit report and an average of four years of overall credit effect. Many banks will look at a foreclosure in light of the market and in light of the borrower's past payment history. If the borrower seems to have gotten back on track, it is possible to qualify for another loan two years after foreclosure. This mortgage will have a higher interest rate, but can be refinanced to a lower rate once the borrower establishes a strong payment history.
Watch out for foreclosure services promising to get creditors out of foreclosure without any effect on their credit rating. These services often over promise and under deliver, costing borrowers precious funds during a down time.
Bank Workouts
Now is a better time than ever to pursue bank workouts. Not only are banks more than willing to work with borrowers since they have been mandated by the government, but they have too many houses on their books already. Additionally, government regulation could be arriving any day now to freeze foreclosures for a small period of time. All of these things increase the odds of buyers being able to keep their homes. Struggling through a tough situation could save a borrower equity in their home, their credit score, and the costs and hassle of moving.
Regardless of how tough a borrower’s situation may become, declaring bankruptcy is never the answer. Even getting a two or three month reprieve from the bank could be enough to spare a borrower from foreclosure.
