Whether you own a home and think you can just stop paying your mortgage and escape foreclosure for the next three years without consequences or are hoping to buy a foreclosed home and make off like a bandit with tens of thousands in profits like you see on reality TV shows, you could be in for a rather unpleasant wake-up call!
There are so many misconceptions and so much misinformation out there it is no wonder homeowners are paralyzed with fear, and newbie investors are finding profits more elusive than imagined.
So, if you are facing foreclosure or want to buy one, what do you need to know?
6 Common Misconceptions About Going through Foreclosure
1. You Have Plenty of Time
Yes, there have been sensational stories in the news about some borrowers getting away without paying their mortgage for years, but others haven’t been so lucky. Remember, these stories make the news headlines because they are sensational and abnormal. In some states foreclosures have been held up to due to scandals and backlogs, but that may now be a thing of the past. Thanks to the recent $26 billion settlement, banks and courts are now once again blazing through foreclosures at record rates. According to a new report by data compiler RealtyTrac, foreclosure filings are soaring as are evictions and bank possessions. The first quarter of 2012 saw foreclosures jumping in almost every city in Florida, ranging from a 37 percent year-over-year increase in Miami to 148 percent leap in Palm Bay. How long it will be before the sheriff comes to drag you out depends on your lender, your state laws and how attractive your individual property is.
2. The Bank Doesn’t Want to Take Your Home
Some lenders are experimenting with alternatives to traditional foreclosures, and the truth is that it may not always be in the best interest of banks to foreclose if they can find a way to work things out with borrowers. Unfortunately, this doesn’t mean they won’t do it. Banks are mad. They are angry at losing money, people not paying, getting busted for fraud and having their bonuses cut. Plus, the last thing they want is for more borrowers to think they can get away with not paying them. Now, as many markets are beginning to improve, lenders also smell profits to be had if they grab homes before they go back up in value.
3. All Your Problems Will be Over Once the Bank Takes Away Your Home
You can just ride out the next few months without payments and when your home is taken away you’ll finally be out of debt right? Wrong!
In many states deficiency judgments are still allowed. This means if you owed $300,000 on your home and your bank takes your home for non-payment and can only sell it on for $150,000, you still owe the difference and they will hunt you down for it for years. So no more home and still in debt, plus your credit is smashed. Almost anything is better than this scenario – check out your options.
4. Filing for Bankruptcy is the Fast & Easy Way Out
Far from it; it may the best option for a select few homeowners, but it is not the answer for everyone. Bankruptcy can have major consequences for decades. Plus, it costs money, and you’ll probably have some catching up on your taxes to do before you can file.
5. Loan Modifications are Always Great
Homeowners should certainly inquire about a loan modification, rather than burying their heads in the sand, but this doesn’t mean they are always all they are made out to be. A loan modification could limit your future options, most don’t end in principal reductions, and some may even result in owing more on your underwater home or even higher payments. The bad news is you may have to apply for one anyway if you want to sell as a short sale or file bankruptcy.
6. You Can’t Sell Your Home Because You Don’t Have Equity
This is definitely not true. No matter how much more you owe on your home than it is worth right now, you can still sell, get out of debt and perhaps even receive a huge payout to go buy or rent a new home and furnish it. Banks have been offering borrowers $20,000 or more to complete short sales, while allowing them to sell their homes for hundreds of thousands less than they owe and forgiving the debt.
5 Common Misconceptions About Buying Foreclosures
1. All Foreclosure Properties are Bargains
When real estate agents started realizing how much more attention foreclosure listings received due to their perceived discounts, all of a sudden almost everything started getting listed as a “foreclosure.” There are incredible deals to be had on foreclosure homes – just make sure you are paying attention to how much the home is really worth today, not what it was worth seven years ago; that is pretty much irrelevant today. Just because a property is cheap doesn’t mean it is a good deal either. As an investor you still need to sell or rent it out to make a profit. A $1,000 home may sound cool, but a burnout or condemned home may end up being a $30,000 tear down before you can even start re-building.
2. All Foreclosures are in Bad Shape
Not at all – many are run-down, neglected or vandalized, but others are in great shape. HUD often begins renovating their REOs (real estate owned or bank-owned properties) before they are auctioned off and short sales are often still in pristine condition.
3. Banks are Giving These Properties Away
Banks do need to get rid of these properties but that doesn’t mean they make it easy. They still want to make as much as they can on them and like to make everyone play by their rules, even if they are unreasonable. Sometimes this means having to accept terms that you would never consider otherwise.
4. Foreclosure Auctions Always Offer the Biggest Discounts
Auctions have been a great way for real estate investors to buy homes. However, their tremendous popularity has also meant increasing competition. Too many people bidding means shrinking profits, but they are still well worth checking out. However, there are other options too.
5. It’s Too Tough to Get a Mortgage Today
Lenders are a lot tougher about whom they make loans to today, but lower interest rates and cheap homes mean many more individuals qualify than before. For those purchasing homes to fix or flip, Fannie Mae HomePath financing, FHA 203 (k) rehab loans and transactional funding all offer attractive options.