It is possible to get a bank to buy back a home instead of foreclosing on it, but the best time for the borrower to negotiate this situation with the bank is at the first sign of trouble, not when foreclosure is imminent.
If you believe that you are heading for foreclosure, contact your bank or lender and ask them to buy back the house. It’s easy to see why a homeowner would want to do this – it saves him from foreclosure and from severely damaging his credit. Why, though, would a bank want to do this? Buying back a house from a homeowner actually is much less of a hassle for the bank than going through foreclosure. The hassle for the bank usually comes in the form of the homeowner’s other creditors. Creditors who have higher priority than the foreclosing lender get the money owed them before the foreclosing lender is paid off, even if they did not commence the foreclosure and their loans are not delinquent. Generally, no creditor has higher priority than the purchase money lender, but there is a risk that tax liens (which are superior to all liens including purchase money liens), mechanic’s liens, low foreclosure sale price, and homestead protection laws will take large bites out of the money the lender would collect through foreclosure. All this means that even after foreclosure, a lender might not get what its owed. If the bank buys back the house and sells it, all superior liens must still be paid, but it doesn’t have to contend with homestead exemptions and the discount pricing that usually results from foreclosure sales.
Not all banks and lenders will be willing to buy back a house instead of going to foreclosure, but it is in the homeowner’s best interest to investigate this option before the foreclosure happens. Banks are most likely to consider re-purchasing a home if the market is booming, as it was just recently. This is because the bank can cover its potential losses to other creditors and costs and fees with appreciation. In a hot market, the house may have appreciated enough to allow the lender to recoup the costs of the mortgage and interest even if the homeowner was only in the house for a brief period of time.
If the bank will not repurchase your home it is still a good idea to consult with them if you think you will be unable to make your payments. Usually, since the bank loses money when you stop making payments (remember, they’re interested in interest, that’s where the profit comes from) they’re willing to go some way to help you find a way to continue making payments. They may refinance or temporarily reduce payments.