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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
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- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Voluntary Foreclosure
Once the borrower takes a mortgage on your property, the borrower is expected to repay the loan through monthly scheduled installments.
If the borrower is unable to repay the mortgage payments the lender has the right to foreclose the property and sell it to recover their loss.
This is how the mortgage process generally works. However, there is an option where the borrower does not have to wait for the lender to foreclose the property in case of missed payments.
In this post, we will understand what voluntary foreclosure is in detail.
What Is A Voluntary Foreclosure?
Voluntary foreclosure means a foreclosure that is initiated by the borrower. Borrowers are ready to go into foreclosure because they can’t repay the mortgage payments or they want to avoid future mortgage payments.
Just like involuntary foreclosure the ownership of the property is transferred to the lender from the borrower.
An involuntary foreclosure occurs when the borrower struggles to pay or avoids payment altogether.
In non-voluntary foreclosure, the borrower has to evict the property after notice is provided by the lender.
In the case of nonvoluntary foreclosure the borrower has to lease the property on the lender’s terms, hence, a friendly foreclosure is often the best option for borrowers.
They can evict the property on their terms and pay off the loan more quickly.
This type of foreclosure is bad for the borrower and can make it difficult for years to rent or buy a home and get approved for a loan, but they are not financially damaging as a non-voluntary foreclosure.
Hence, this option could make more sense if the borrowers are sure that they are unable to make further payments on their mortgage.
Many borrowers choose to open new credit lines or take new credit cards and plan for this type of foreclosure before their credit scores drop.
Most lenders allow borrowers to request a friendly foreclosure as it can make the process of undertaking the property and collecting debts faster and more efficient compared to a non-voluntary foreclosure.
A borrower might enter into this type of foreclosure due to unexpected unemployment, the perception that the borrower has too many overhead expenses to cover the mortgage payments, dramatic changes in the housing market, and fluctuating interest rates in the case of ARMS.
One of the most widely used voluntary foreclosures is a deed in lieu of foreclosure. Regulations, guidelines, and fees for this type of foreclosure are based on lenders and the state.
What Are The Pros and Cons of Voluntary Foreclosure?
Pros:
1. Prompt payments
This type of foreclosure is used as a final option for borrowers but may provide the quickest way to obtain relief from the debt.
The friendly foreclosure process can be faster than a nonvoluntary foreclosure. Moreover, this foreclosure is initiated by the borrower, which allows the borrower to determine if he can pay at any time.
2. Option to eviction for the borrower
It is better to leave your own home than to be forced to leave it by non-voluntary foreclosure.
In this type of foreclosure, the borrower can plan where they plan to move. It relieves you from the stress of your next home.
3. Less credit risk than non-voluntary foreclosure
Voluntary foreclosures have less impact on your credit than involuntary foreclosures.
A borrower can lower the credit impact and shorten its length by using a deed in lieu of foreclosure.
Deed in lieu of foreclosure will only impact 4 years compared to 7 years in case of non-voluntary foreclosure.
4. Faster and easier process for borrowers
Compared to a non-voluntary foreclosure, a voluntary foreclosure can be a win-win for both lender and borrower.
This process is faster and less stressful for both parties.
Cons:
1. Credit is still very important
Though the impact on credit is less in this type of foreclosure, it is still a negative one.
Your credit score will decrease and you would be facing the consequences in the future while acquiring credit.
2. Deficiency Judgement
The borrower may still be subject to a deficiency judgment after choosing to foreclose the property voluntarily.
3. Employment and credit problems
The borrower may face issues qualifying for credit in the future due to the negative impact on credit.
Some employers may deny your job application due to bad credit ratings.
Conclusion
There are various other ways to avoid this type of foreclosure. You can speak to your lender and come up with a payment plan option or forbearance plan.
Most lenders avoid any type of foreclosure as it is a costly and time-consuming option for them as well.
Even after considering all the options, if you foresee that you are still unable to make the payments in the future, voluntary foreclosure could be the best option.
