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Understanding Voluntary Foreclosure: A Guide by O1ne Mortgage

In this article:

• What Is Voluntary Foreclosure?
• Pros and Cons of Voluntary Foreclosure
• Alternatives to Voluntary Foreclosure

What Is Voluntary Foreclosure?

A voluntary foreclosure occurs when a borrower decides to surrender their home to the lender because they are unable or unwilling to continue making mortgage payments. This process allows the lender to take possession of the property. If your mortgage is underwater, meaning you owe more than the home’s market value, voluntary foreclosure can be a way to avoid involuntary foreclosure and eviction.

Pros and Cons of Voluntary Foreclosure

Before opting for voluntary foreclosure, it’s crucial to weigh the advantages and disadvantages.

Pros

• Cut your losses: Leaving on your own terms can be less socially stigmatizing than being forcibly evicted. It also provides time to plan for the future and reduces the stress of the foreclosure process.
• Stop payments sooner: Voluntary foreclosure allows you to stop making mortgage payments, which can be beneficial if your mortgage is underwater or you’ve lost your income source.
• Faster process: Compared to standard or involuntary foreclosure, the voluntary foreclosure process is quicker and easier for both you and the lender.
• Less credit impact: While any foreclosure affects your credit, a voluntary foreclosure may have a lesser impact due to the use of a deed in lieu of foreclosure. An involuntary foreclosure can affect your credit for seven years, whereas a deed in lieu may impact it for only four years.

Cons

• Deficiency judgment: You may be required to pay the difference between your home’s value and the remaining mortgage balance.
• Finding a new home: You’ll need to secure new housing, which can be challenging as some landlords may be hesitant to rent to you, and qualifying for a new mortgage may be difficult.
• Tax implications: The IRS considers canceled debt as taxable income, so you may incur taxes even if your debt is forgiven.
• Impact on credit: Although the credit impact is less severe than involuntary foreclosure, it will still significantly affect your credit score, making future credit harder to obtain and more expensive.

Alternatives to Voluntary Foreclosure

Before deciding on voluntary foreclosure, consider these alternatives, which may have less impact on your credit and finances:

Mortgage Forbearance

Your lender might offer mortgage forbearance, temporarily suspending or reducing your payments if you can demonstrate financial hardship.

Mortgage Loan Modification

If you’ve had a temporary financial setback, your lender might modify your mortgage terms, such as extending the repayment period to lower monthly payments.

Short Sale

A short sale involves selling your home for less than the mortgage balance, with the lender’s approval. The remaining debt may be forgiven or require repayment arrangements.

Partial-Claim Loan

Government-backed loan programs, like those from the FHA, may offer a small loan to help pay your mortgage balance, which you’ll need to repay in addition to your mortgage.

The Bottom Line

Foreclosure impacts your physical, mental, and financial health. While sometimes unavoidable, it’s essential to consider steps to mitigate the damage. If your home’s market value is declining, voluntary foreclosure might be an option, causing less credit damage than involuntary foreclosure.

If you face foreclosure, start rebuilding your credit as soon as possible. Monitor your progress with tools like Experian’s free credit monitoring. With time, patience, and effort, you can recover and start anew after a foreclosure.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your options with confidence and ease.

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