The foreclosure Process
Here in Arizona the foreclosure process can be can be completed in as little is 91 days. After falling behind on mortgage payments for a few months, homeowners are given a notice by their lender. The lender intends to foreclosure on the property. From there, the homeowner has a few options – pay all past due amounts which now include the late and legal fees. Homeowners who do this often get a personal loan or secure a loan against the property. If this is not an option, the homeowner can request forebearance. In simple terms, forebearance is taking the past due amount of the loan and tacking it on to the tail end. Lenders may not want to do a forebearance, however. Another option is to sell the home prior to the home foreclosing.
Selling the property will prevent the homeowner’s credit from getting destroyed. A foreclosure can reduce a credit score by up to 300 points. It also makes it very difficult to obtain a loan for up to 7 years thereafter. If the home is sold, the lender will still report the late payments to the credit reporting agencies (Equifax, Experian, TransUnion). This will negatively impact the credit score and future borrowing ability but not to the extent a foreclosure would.
We follow the weekly foreclosures at the Maricopa County courthouse. It’s surprising to see homeowners with equity take no action to avoid foreclosure. It’s undoubtedly stressful to be in that situation but the worst thing a homeowner can do is to do nothing. If you’re in this situation please reach out for advice on how to soften the fall – you have options.
Subject To
One option not commonly known to homeowners is the Subject To process of an investor buying the property. When an investor purchases a property ‘subject to any existing liens and encumbrances’ it simply means they buy the house and take over any loans. A possible advantage to the homeowner is the negative impact to credit is lessened. The outstanding loan(s) is/are brought current and payments made by the investor going forward reestablish positive credit reporting.
While the investor is making the monthly payments, the lender is reporting timely payments to the homeowner’s credit report. So, rather than multiple late payments and a closing of the loan due to sale. The homeowner’s credit shows multiple late payments and a reinstated loan in good standing.
The Subject To method is also attractive to an investor who doesn’t have to incur the time and expense of getting a new loan. The investor either occupies the home, rents the home, or repairs / renovates the home and sells it in the future.
The homeowner doesn’t walk away empty handed. Depending on the amount of equity and potential upside in the property, the investor will compensate the homeowner. For example – a home that is in need of repairs but is worth $500,000 in show-ready condition. $250,000 is owed and an additional $25,000 in penalties/fees from the lender. The investor buys the home for $425,000. $25,000 of that brings the loan current. The homeowner receives $150,000 ($400,000 – $250,000) and gets to walk away: no repairs, no showings, no real estate commissions.
There are a lot of options in a Subject To deal. If that is of interest please reach out and we’ll be happy to discuss your options.
