What Is Voluntary Foreclosure?

A voluntary foreclosure is initiated by a borrower who is unable or unwilling to make mortgage payments on their home. In this scenario, the lender takes possession of the property. This option can be considered if your mortgage is underwater, meaning the principal amount you owe on the home is more than its fair market value. Voluntary foreclosure can prevent involuntary foreclosure and eviction.

Pros and Cons of Voluntary Foreclosure

Pros

• Cut your losses: Leaving on your own terms can have less social stigma than being forcibly evicted. It also gives you time to make future plans and relieves some of the pressure of the foreclosure process.
• Stop payments sooner: Voluntary foreclosure allows you to stop making mortgage payments, which can be advantageous if your mortgage is underwater or you’ve lost your source of income.
• Faster process: Compared to a standard or involuntary foreclosure, the voluntary foreclosure process can be much faster and easier for both you and the lender.
• Less credit impact: Although any type of foreclosure impacts your credit, a voluntary foreclosure may affect your credit to a lesser degree due to the use of a deed in lieu of foreclosure. An involuntary foreclosure can impact your credit for seven years, while a deed in lieu of foreclosure may only impact it for four years.

Cons

• Deficiency judgment: A deficiency judgment is a court ruling that requires you to cover the debt in full if you default on a loan secured by your home. With a voluntary foreclosure, you may be liable to pay 100% of the difference between the value of your home and the remaining balance on your mortgage.
• Finding a new home: You’ll need to find a new home, and some landlords may be reluctant to rent to you. Additionally, you most likely won’t qualify for a new mortgage immediately. For example, Fannie Mae requires a four-year waiting period before you’re eligible for a new mortgage after a deed in lieu of foreclosure.
• Tax implications: The IRS considers a canceled debt as taxable income. With a voluntary foreclosure, your debt may be forgiven, but you may still incur taxes, which can be costly.
• Impact on credit: Although the impact on your credit may be less than with an involuntary foreclosure, your credit will still take a major hit. This can make it much more difficult to qualify for credit in the future, and if you do qualify, the interest rates will likely be significantly higher.

Alternatives to Voluntary Foreclosure

If you are considering a voluntary foreclosure, take a look at several alternatives first. They may have less impact on your credit, finances, and life than a foreclosure will have.

Mortgage Forbearance

Your lender may be willing to work with you to provide mortgage forbearance, a temporary suspension or reduction in your payments. You may qualify if you’ve experienced a recent increase in your living expenses or a reduction in your income. However, you must demonstrate that you can make the new payments and meet the requirements of the new repayment plan.

Mortgage Loan Modification

If you had a temporary financial setback, your lender might be willing to work with you to modify the terms of your mortgage. For example, your lender might extend the length of time you have to pay off your mortgage, which can often lower your monthly payments. However, lengthening your term can mean you pay more in interest over time.

Short Sale

A short sale agreement means your lender is willing to accept less than the mortgage amount you currently owe. Sometimes the difference is forgiven by the bank or lender, or you may have to make arrangements to pay off the remainder of your mortgage debt upon the sale of your home. Short sales are typically done to avoid foreclosure on the home.

Partial-Claim Loan

Some government-backed loan programs, like those supported by the Federal Housing Administration (FHA), may allow you to receive a small loan to apply to your mortgage balance. However, keep in mind that in addition to paying off your mortgage, you’ll also be required to pay back the loan.

The Bottom Line

Foreclosure doesn’t only affect your physical and mental health but also your financial health. Sometimes, however, it can’t be avoided, so it’s important to consider steps to lessen the blow. If your home has lost market value and may continue to do so in the foreseeable future, a voluntary foreclosure may be an option. And a voluntary foreclosure does less damage to your credit than an involuntary foreclosure.

Even so, if you experience a foreclosure, your best bet is to take steps as soon as possible to start rebuilding your credit. Keep an eye on your progress by checking your credit report and score with Experian’s free credit monitoring. With time, patience, and a little hard work, you can bounce back and start anew after a foreclosure.

Contact O1ne Mortgage for Expert Mortgage Services

If you are facing foreclosure or need assistance with your mortgage, O1ne Mortgage is here to help. Our team of experts can guide you through your options and help you make the best decision for your financial future. Call us today at 213-732-3074 for any mortgage service needs. We are committed to providing you with the best service and support during these challenging times.