The basic concept of foreclosure is that when a house is sold at an auction, the lender will recover the amount of the mortgage, and the new owner will move in and live happily ever after. Or maybe an investor will buy the home, rent it out for a while (maybe to you), benefit from some tax write-offs, and then sell the home when it has gone up in value.
The thing is, that’s not how it works these days. Unfortunately for the banks and investment communities, neither of these scenarios reflects reality for one simple reason: Prospective buyers are unwilling to offer the minimum bid—typically the amount necessary to pay off the first mortgage. And so the lender is stuck with property it doesn’t want. Lenders aren’t landlords; few have divisions that can rent the property out, manage it, and resell it when the time is right.
Primarily for this reason, lenders are putting off foreclosure proceedings as long as possible, in the hopes of working something out with the homeowners to keep them in their houses—and keep at least some mortgage payments flowing in. Also, foreclosure proceedings are put on hold pending assessment by the mortgage servicer as to whether you qualify for a HAMP modification or HARP refinance. (See our article on refinancing or modifying your mortgage under the Making Home Affordable program.)
If, early on, you decide that you don’t want to keep your house and will ultimately be moving on, you may be able to skip payments for many months before the foreclosure process finally begins. And even after the foreclosure sale, chances are great that you can keep living in the house for a while longer free of charge. In all but a few states, you can stay in your house until the new owner gives you a formal written notice demanding that you leave. (See our Summary of State Foreclosure Laws.)
Having payment-free shelter for many months—both before the foreclosure action is brought and after the sale—gives you a golden opportunity to save some money. And that will grease the skids when you do have to find a new place to live.
Okay, I may have already lost you on this one. But stay with me for a moment, because I’m convinced that home ownership is overrated.
Americans take for granted that owning a home is superior to renting one, especially if you have a family. We accept the phrase "American dream" without question when applied to home ownership. And politicians are wringing their hands over the prospect of the American dream being lost for the millions of homeowners who face foreclosure.
From my own experience, having owned and rented in several different parts of the country, and having worked with bankruptcy clients throughout my career, I know that ownership is not an automatic key to happiness. For now, just try to open your mind to the possibility that renting rather than owning is not always a bad way to go.