Home Foreclosure Options Explained
Foreclosure occurs when the homeowner falls behind in monthly mortgage payments and
defaults on the loan. The lender repossesses or sells the home in order to satisfy the debt. Typical
options you can pursue to avoid a home foreclosure are set out below. Your solution will depend
on your financial status, the mortgage's default status, the type of loan you have and the various
laws that apply.
Reinstatement
Prior to a foreclosure sale, borrowers have the right to reinstate a delinquent loan. The
reinstatement option gives homeowners the opportunity to make up back payments plus any
incidental charges incurred by the bank such as filing fees, trustee fees and legal expenses.
Paying off the reinstatement amount will cancel the foreclosure and enable the homeowner to
continue to live in the home as if no default occurred. For many delinquent borrowers, however,
reinstatement is not an option because they are deep in debt and cannot make up back payments,
plus other expenses.
Short Sale
A short sale occurs when a property is sold and the lender agrees to accept a discounted
payoff, meaning the lender will release the lien that is secured to the property upon receipt of less
money than is actually owed.
Short Refinance
In a short refinance, the lender may agree to forgive some part of your debt and refinance
the remaining debt into an entirely new loan.
Special Forbearance.
A forbearance is an agreement made between a mortgage lender and delinquent borrower
in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the
borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower
current on his or her payments. A forbearance agreement is not a long-term solution for
delinquent borrowers; it is designed for borrowers who have temporary financial problems
caused by unforeseen problems such as temporary unemployment or health problems.
Borrowers with more fundamental financial problems - such as having chosen an
adjustable rate mortgage on which the interest rate has reset to a level that makes the monthly
payments unaffordable - must usually seek remedies other than a forbearance agreement.
You may qualify for this if you have recently experienced a reduction in income or an
increase in living expenses. You must furnish information to your lender to show that you would
be able to meet the requirements of the new payment plan.
Mortgage Modification.
A mortgage modification is a modification to an existing loan made by a lender in
response to a borrower's long-term inability to repay the loan. Loan modifications typically
involve a reduction in the interest rate on the loan, an extension of the length of the term of the
loan, a different type of loan or any combination of the three. A lender might be open to
modifying a loan because the cost of doing so is less than the cost of default.
A loan modification agreement is different from a forbearance agreement. A forbearance
agreement provides short-term relief for borrowers who have temporary financial problems,
while a loan modification agreement is a long-term solution for borrowers who will never be able
to repay an existing loan.
You may qualify if you have recovered from a financial problem and can afford the new
payment amount. Most lenders can work with home owners even if they have poor credit and
have a foreclosure date. Chances to obtain a loan to regain a current status on your mortgage
become diminished once you have received a notice of default (NOD). Notice of Default is
usually sent after 90 days of the mortgage payment being late.
Partial Claim.
Your lender may be able to work with you to obtain a one-time payment from the FHAInsurance
fund to bring your mortgage current. You may qualify if:
• your loan is at least 4 months delinquent but no more than 12 months delinquent;
• you are able to begin making full mortgage payments.
When your lender files a Partial Claim, the U.S. Department of Housing and Urban
Development will pay your lender the amount necessary to bring your mortgage current. You
must execute a Promissory Note, and a Lien will be placed on your property until the Promissory
Note is paid in full. The Promissory Note is interest-free and is due when you pay off the first
mortgage or when you sell the property.
Pre-foreclosure sale.
For owners who don’t care to save the property, or who have no other choice than to let
the property go, selling the property may be a smart choice. If you have enough equity in the
house to allow you to pay off the mortgage in full, then a sale is usually your best option. This
option preserves your equity and what’s left of your credit score. Selling also leaves you in a
much better financial position should you want to buy another home in the future.
Deed-in-lieu of foreclosure.
A potential option taken by a mortgagor (a borrower) to avoid foreclosure under which
the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in
exchange for the release of all obligations under the mortgage. Both sides must enter into the
agreement voluntarily and in good faith.
A deed in lieu of foreclosure has advantages for both a borrower and a lender; mainly the
avoidance of time consuming and costly foreclosure proceedings. In addition, the borrower
avoids some public notoriety, and may even be able to lease the property back from the lender.
The homeowner needs to assess certain risks which include, among other things, the risk
that the property is not worth more than the remaining balance on the mortgage and that junior
creditors might hold liens on the property.
This won't save your house, but it is not as damaging to your credit rating as a
foreclosure. You may qualify if:
• you are in default and don't qualify for any of the other options;
• your attempts at selling the house before foreclosure were unsuccessful; and
• you don't have another FHA mortgage in default.
Bankruptcy
A Chapter 13 bankruptcy filing can stall or derail foreclosure proceedings. That's because
of bankruptcy's "automatic stay" provisions that force creditors to the sidelines while the
bankruptcy court sorts things out. The lender can petition the court to allow it to continue with
the foreclosure, depending on where you are in the foreclosure process, but it should buy you
some time.
If there is no equity in the house (today's value less costs of sale less payoff balances on
all liens) the trustee in a Chapter 7 may abandon the house to you. That is, you keep it, as long as
you pay the mortgage.
A bankruptcy does not relieve the property of the liability for voluntary liens, like
mortgages or deeds of trust, nor for tax liens. So, the lender retains the right to foreclose if you
don't pay.
|
