Whether you are deciding to let the house go or the decision has been made for you, this is a time for most people that can be unfamiliar, stressful, and difficult. Wherever you may be in the foreclosure process, it is never too early to plan and save for a smooth and successful transition out of the home. For the sake of this article, I will be referencing the traditional Minnesota Foreclosure by Advertisement process. Remember though, these concepts will pertain to many different situations.
Timeframe and Basic Plan
In Minnesota, lenders are required to send a pre-foreclosure letter notifying the homeowner that they are facing foreclosure and that there is counseling available in their county. This letter usually precedes the sale date by about three months. On top of that, there is a six month period of redemption AFTER the sheriff’s sale date. This means a MINIMUM of nine months where no mortgage payments are accepted, but the homeowner can still live in the house.
It is extremely important, however to execute a plan that will have you out of the house BY THE END of the redemption period. The options typically available at this point are riding out the foreclosure, a deed in lieu of foreclosure (giving the house back to the lender voluntarily), and a short sale. A short sale simply means that you sell the house, with lender permission, for less than is owed on the mortgage.
A landlord may be willing to overlook a poor credit score or a pet or two, but rarely will they overlook an eviction, or unlawful detainer. This is a seven year stain on a credit report that can make it extremely difficult to find alternative housing.
With proper planning and savings, a rental should be attainable despite the credit challenges on the credit report. If a family is expecting to pay $1000 a month in rent and related costs, then “practice” by saving $1000 a month during this free living period. This accomplishes two major goals:
- It establishes a “life after home ownership” budget and lifestyle expectation AND
- It provides $9000 of saved money, which will be handy for moving expenses, first and last month’s rent, deposit, etc.
Remember, money talks. If a prospective landlord is nervous about a credit score, offer an extra month’s rent in the form of a deposit. Negotiate the terms so that after six months of perfect payments, the money is returned. Same applies to pets. An extra $1000 deposit (for as short a term as possible) will ease the landlord’s mind about potential urine-stained carpets and chewed up trim boards.
Alternatives to Avoid
Many families are still facing difficult times in realizing they will have to rent for several years. There is always the lure of owning another home. This opens the door for consideration of rent to own properties or contract for deed purchases. There are often hidden reasons for offering a home sale in this manner, from the seller’s perspective. Often, these homes are not sold on the traditional market for a range of reasons – from a complicated and expensive title issue to capital gains tax avoidance for the seller to a septic tank or electrical system that is hopelessly outdated.
This is definitely a “buyer-beware” situation. In short, rent to own offers all of the risks of home ownership with none of the benefits. The “buyer”, who is actually a renter, takes on repair costs and responsibilities of the property. Oftentimes the “buyer” will also be required to pay the property taxes and insurance as well. Little or none of the rent money is going toward the purchase price and the landlord usually has the final say in changes to the home or property. Essentially, rent to own is simply not worth the hassle.
A contract for deed is a bit different. Again, many of the same reasons for selling this way are pertinent here as well. A down payment is required, along with a payment schedule of usually three to five years. The down payment is, of course, non-refundable and the balance comes due at the end of the term as well. This means there is limited time to repair what is usually severely damaged credit. The buyer is really betting that down payment that he or she can qualify for a mortgage a few years down the road (assuming any title or property issues have also been resolved).
Many are worried about the impact of foreclosure on the credit report. It is devastating, undoubtedly. Credit is always a consideration when it comes to debt, but making it the priority factor in decision-making may create other problems. For instance, a family with no savings and no place to move to needs time to develop savings and a plan, as discussed above. Moving out five months early to save a few dozen points on the credit score can literally set a family back months, even years.
Do what is best for the family. If time and money are in great need, then riding out foreclosure is likely the best route. If there is a new job in Colorado that starts soon, then a short sale may save the cost of maintaining an extra property (utility costs, hired maintenance, etc). You can always negotiate to give the property back (called a deed in lieu of foreclosure) if there is a need to get out sooner rather than later.
Most people would benefit from having six to nine months of no rent or mortgage payment. It allows for savings, planning, debt reduction, or getting caught up on other things like auto maintenance or delinquent utilities. Always keep in mind that accessing housing counseling is the best first step. This will allow you to get an impartial opinion on your situation and options. If you live in Minnesota or Wisconsin and have questions about your mortgage, call LSS – a HUD approved housing counseling agency – at 800.777.7419 or email us at firstname.lastname@example.org. If you live in another state, click HERE to locate a HUD approved housing counseling agency in your area.
For more information, check out Malcolm’s other posts: 5 Ways to Avoid Your Sheriff’s Sale and 5 Lies Your Mortgage Company is Telling (or not telling) You.
LSS Financial Counseling is here to help you regain control of your finances and conquer your debt. You can click here to get started with your online Budget Counseling Session or call 800.577.2227 to schedule a phone or face to face appointment with one of our Financial Counselors. Don’t wait to improve your financial situation – take action today!
Malcolm Johannessen is a Certified Financial Counselor with LSS Financial Counseling and he specializes in Foreclosure Prevention Counseling.