How Do I Avoid Foreclosure:  Part 4

A step by step process for distressed homeowners.

This is the fourth in a series of posts designed to be a step-by-step directory for distressed homeowners to use to try an avoid foreclosure.

We continue the discussion of various options that a distressed homeowner may have. Some of these options only apply to homeowners in very specific situations and will not apply to most; however, if you meet the criteria you should take advantage of any opportunity that presents itself.

Rent the Property

This is an option that will work if you can rent the property to a tenant who can meet their rental commitment long term. The danger in an economy with over 10% unemployment and 26% underemployment is that the tenant can lose their job or take a pay cut in order to keep their job. If that happens, the rent checks are likely to stop coming in while the mortgage payments are still due each month.

Over 40% of home in foreclosure were not owner occupied, meaning that they were rentals or vacation properties. When the rent checks stopped coming in the owners could not continue to make their payments and lost the property to foreclosure. The F word has a major impact on their ability to buy anything on credit for seven to ten years.

The issue of cash flow is also important. Not all homes will rent for enough to cover the mortgage, taxes, insurance and upkeep. Many landlords try to cover the mortgage payment with rental income and have to cover some or all of the taxes, insurance and upkeep with income from other sources; a difficult thing for most of us to be able to do long term.

Refinance

This option becomes increasingly more difficult as housing values decline. A few years ago, when home prices were increasing in leaps and bounds 100% financing was easy to obtain. Today, lenders want to see some equity in the property before they will even consider a loan. Lenders want to see an 80% loan-to-value ratio; that is to say, that they will loan up to 80% of the current market value on a property if all other factors are acceptable. Some will consider going up to 90% of current market value in rare circumstances, but they will charge higher interest rates. It is the risk/reward issue. The higher the risk, the greater the reward to the investor.

Unless you have an equity position of 20% or more given the present market value of your property, refinancing will be very difficult at best.

If your equity position is less than 10% it is not an option.

Here are links to a few web sites with helpful information for less specific situations:

http://portal.hud.gov/portal/page/portal/hud/topics/avoiding_foreclosure

http://www.ForeclosureStopper.org

http://www.CDPE.com

In future posts we will discuss other options people may use to avoid foreclosure. Those posts will be coming soon.

Feel free to contact Mike West, Realtor, CDPE if you have any questions or need help.

(916) 337-0658 e-mail: Mike@BMikeWest.com