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Most home or property buyers in the United States obtain a mortgage when purchasing a home. A mortgage is essentially a loan from a bank or other lender for the purchase price of the home. The buyer must then make monthly payments to the lender until the loan is paid in full. When a debtor gets behind on the payments, the lender may initiate foreclosure proceedings. A homeowner that is facing foreclosure may have foreclosure alternatives, including refinancing the home, selling the home, executing a deed in lieu of foreclosure, or filing for bankruptcy protection.
Foreclosure proceedings will vary somewhat by jurisdiction, but the basic concept remains the same. When a debtor is delinquent in the monthly payments, the lender may immediately call the total amount of the loan due and payable. The lender may then petition the court to foreclose on the property, which gives legal title of the home back to the lender.
One of the many foreclosure alternatives is to attempt to refinance the loan. Many lenders will actually work with the borrower to find a way to refinance the home. In some cases, they will add the late payments to the end of the loan or reamoratize the loan. If the lender will not work the debtor, a debtor may be able to find another lender that will refinance the entire loan thereby avoiding foreclosure.
As the practical realty of a foreclosure proceeding is that the entire balance of the loan becomes due and payable, another one of the foreclosure alternatives is to sell the property. If the current market value of the home is less than what is owed on the mortgage, the debtor may be able to obtain permission from the lender to sell the property in a short sale. In a short sale, the property is sold for the current market value of the property and the lender agrees to forgive any remaining deficit on the loan.
A deed in lieu of foreclosure is one of the less popular foreclosure alternatives; however, it has advantages over a foreclosure. A deed in lieu of foreclosure simply signs the property back over to the lender without the need for a formal foreclosure lawsuit. The benefit to the debtor is that any additional indebtedness incurred in a foreclosure proceeding is avoided. The public nature of a foreclosure is also avoided by executing a deed in lieu of foreclosure.
For debtors that believe their current financial situation is likely to improve, filing for bankruptcy protection is one of the best foreclosure alternatives. An automatic stay is granted when a bankruptcy petition is filed, which prevents all creditors from continuing, or initiating, any collection efforts. During the bankruptcy, the debtor may be able to make arrangements to catch up the payments and avoid the foreclosure altogether.
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