11 Alternatives to Foreclosure in California

When you are a California home owner facing financial hardship, it is important to act immediately to protect your home from being sold at auction. California is a trust sale state, which means that your bank doesn't have to go to court prior to auctioning off your home, but rather merely provide you with sufficient notice of default and trustee's sale. Therefore, when you first know that financial trouble lies ahead, you should begin planning to take evasive action right away. Here is a list of the top ten (and the #1 worst) methods for dealing with this situation.



1. REINSTATE THE LOAN (AKA "PAY IT")

The first and best option you have for avoiding foreclosure is to pay what you owe. This may be harder than it sounds, especially if you are in financial trouble. However, for some, it may be worth liquidating some personal property or taking out a personal loan from family or friends to buy some more time before you go into the Notice of Default (NOD) Period (90 days). If this is absolutely not an option, then you might consider Option #2...



2. MODIFY THE LOAN TERMS (AKA "LOWER YOUR PAYMENT")

More and more, banks are willing to simply go in and adjust your loan type, interest, or other terms to create a more workable situation for your finances that keeps them from having to pursue a foreclosure and keeps you in your home. The most common modification is to switch from one of these predatory subprime loans (negative amortization, adjustable rate, balloon seconds), to a more traditional thirty year fixed loan. These have lower interest rates, predictable payments, and most importantly, no awful surprises laying in wait. Talk to a lawyer in your area for representation.



3. REFINANCE THE LOAN (AKA "CLEAN SLATE")

This option is less common these days, especially due to the credit crunch on Wall Street. Most banks require such stellar credit for financing, that it is next to impossible for someone who has payment issues with their home loan already. However, bank programs change all the time, and you may just get lucky. Talk to a loan officer in your area to see if you might qualify.



4. FORBEARANCE (AKA "TAKE A TIME OUT")

Your bank may be willing to provide a period of forbearance on your loan (sometimes for a fee) which puts your payments on hold altogether for a period of time to help you get back on your feet. An alternative measure may also be to simply make decreased payments for a few months while you are facing hardship. Call your bank to deal with them directly before contacting an attorney to negotiate on your behalf.



5. PARTIAL CLAIM (AKA "LOAN ME SOME MORE")

A partial claim works similarly to a forbearance, except that the bank will actually add the months' of missed payments onto your loan as an additional loan on top of your mortgage. So, you get some time to get back on your feet, but the bank is going to make you pay double for it in the long run. At least you get to keep your home. If forbearance, above, is not an option, follow up with a partial claim offer, which sweetens the deal for the bank, and increases your chances of acceptance. It is wise to have a loan officer or attorney review the terms and conditions prior to signing any new loan documentation.



6. DEED IN LIEU OF FORECLOSURE (AKA "WALK AWAY")

The next couple options are not as appealing as the previous five, because most homeowners and families in default want to stay in their homes. These options all involve giving up your home, but possibly salvaging your credit so that you can start over. Deed in lieu of foreclosure basically saves you and the bank the heartache of fighting it out, and you simply walk away. It's possible for the same reason, above, that the bank can summarily sell your house from under you if you stop paying: California is a trust deed state. The mortgage is what bankers call a "secured" loan, which means that their only recourse on the loan is the home. You walk away, the banks gets the house, and that's the end of it.



7. SELL IT ("IF YOU CAN...")

If you're in Stockton, selling is probably 99% not likely to be an option. (Stockton is the hardest hit city in America by the foreclosure boom. Prices have plummeted below 50% of their values in just two years, and at least one in four homes is in foreclosure. - if you're in Stockton, consider deed in lieu, above: let the bank take the loss on the home's value, and save yourself hundreds of thousands in the long run.) However, if you are in a situation where you have equity in your home (its worth more than the mortgage), then you may be able to sell it at or slightly under market value and try to start over. This saves your credit and preserves your assets. Talk to a REALTOR' in your area to see whether your home is likely to sell, and for how much.



8. SHORT SALE (AKA "SELL FOR UNDER")

Banks may be willing to take up to a 40% loss on the principle of the mortgage if you can simply sell the property at any price. While many banks are unable to take such a loss today because of the credit crunch, they are still in a position where they would rather cut their losses on a short sale than deal with the hassle and expense of pursuing an inevitable foreclosure. You need a REALTOR' who specializes in short sales who can get an offer to pitch to the bank. If the bank approves the short sale, you can walk away. And while the balance was formerly seen by the IRS as a taxable "gift", thanks to George W. Bush, you will now not have a cent of tax liability after your short sale. Talk to a REALTOR' in your area.



9. BANKRUPTCY (AKA "SEVEN YEARS BAD CREDIT")

In California, if you live in the property as your primary residence, then you can get a stay of execution on your home, as well as have all of your debt payments restructured. The most important thing is to keep up with your payments. So long as you do this, you keep your home, have lower monthly obligations, and the bankruptcy disappears from your credit after seven years. Bankruptcy is no a free lunch, though, so be sure to consult with a bankruptcy attorney in your area if you are considering this option.



10. PAY THE LOAN OFF (AKA "SETTLE")

This last option sounds very unrealistic, but is actually a segway into a realistic option for some, which is to settle the entire debt with your bank at a reduced amount. For instance, a homeowner had a $120,000.00 second loan on her home. The bank wrote off the debt in exchange for $25,000.00 - $10,000.00 up front, and $15,000.00 over three years, at NO INTEREST. Because the banks are so hard up for cash these days, this option may just work for some who still have some savings, but it looks like trouble is ahead.



11. DO NOTHING (AKA "TERRIBLE IDEA")

Terribly, some defaulting homeowners, feeling scared and ashamed, do the wrong thing: nothing. They hide. They stop answering the phone and the door. They don't respond to bank letters. They allow the walls simply to close in on them, getting thrown out of their home. With all of the options above, there is absolutely NO excuse to become one of them. If you find yourself in this situation, act immediately.





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Michael Rooney is a California attorney and real estate broker who helps homeowners to keep their homes. He is a DRE-approved provider of continuing education to REALTORS'. His consumer protection course, "Foreclosure Fictions and Facts", teaches REALTORS' about ethical duties to clients. For San Francisco loan modification or more on REALTOR' continuing education, please visit: http://mikerooneylaw.com/modification.aspx.