Although there is no magical way to end the foreclosure process, homeowners facing foreclosure do have options. Believe it or not, most lenders do not want to foreclose on your home. While it is not possible to stop every foreclosure, in most cases the foreclosure process can either be stopped, or stalled. Taking action often will provide the homeowner with at least some modicum of time to find a workable solution. The remainder of this article sets forth seven (7) options to consider.
1. Total Reinstatement.
Reinstatement is an option available to homeowners who can pay the total delinquency- the past due amount owed to the lender(s)- in full. This option requires the homeowner to remit a bank certified check that will cover the total arrearages, including all past due payments, late fees, and costs assessed to the account.
2. Forbearance Agreement / Repayment Plan.
A second option is working out a forbearance agreement with the lender's loss mitigation or mortgage forebearance department. A delinquent property owner can ask the lender if the lender would be willing to arrange a repayment plan based on the borrower's financial situation. With a forbearance agreement, the lender will agree not to foreclose so long as the borrower adheres to the exact terms of the forbearance agreement which typically will provide a temporary reduction or suspension of the borrower's payments, followed by increased payments at 1.5 to 2 times the prior monthly mortgage amount until all of the arrearages (delinquent payments, interest, late fees, and costs ) are paid and the loan is brought current. A lender will be more likely to enter into a forbearance agreement with the borrower, if the borrower has recently experienced a temporary reduction in income or an increase in living expenses and can furnish proof to the lender that the borrower can now meet the requirements of a new payment plan.
But be careful. Forbearance Agreements typically provide that if the borrower fails to comply with the exact terms of the agreement (an hour late or $1 short), that the lender may institute a foreclosure sale immediately.
3. Loan Refinance or Modification Agreement.
A borrower may be able to refinance the debt and/or extend the term of the mortgage loan. Exercising this option may enable the borrower to reduce the monthly payment to a more manageable amount. A borrower with a 720+ FICO should easily qualify for a loan refinance.
If the borrower's FICO score is less than 720, the borrower may still qualify for a loan modification. Unlike a forbearance agreement which provides a temporary stay to borrowers who have experienced a temporary financial problem, a loan medication agreement is for the borrower who cannot satisfy the terms of their current loan. Loan modification agreements are best suited for borrowers with variable interest rate loans which have, or are soon to, reset at a higher increase rate that will make the monthly mortgage payment unaffordable.
A loan modification agreement may provide, where needed, for the delinquency (late payments, interest, late fees, and costs) on the existing loan to be added to the principal of the modified loan. A loan modification agreement may also be structured with a lower interest rate and/or for a longer term (e.g. from 30 years to 40 years). The result is a loan brought current with possibly a larger principal balance and either a reduced monthly mortgage payment or at the very least a fixed monthly mortgage payment.
4. Partial Claim.
The lender may be able to work with a borrower to obtain a one-time payment from the FHA-Insurance fund to bring the borrower's mortgage current. The borrower may qualify if: (1) the loan is at least 4 months delinquent but no more than 12 months delinquent; and (2) the borrower can prove he or she is now able to begin making full mortgage payments. If the lender files a Partial Claim, HUD will pay the lender the amount necessary to bring the borrower's mortgage current if the borrower executes a Promissory Note granting HUD a lien until the Promissory Note is paid in full. The Promissory Note is interest-free and is due when the borrower pays off the first mortgage or sells the property.
5. Short Sale.
With a short sale the lender allows the borrower to sell the property for less than is presently owed and to avoid foreclosure. A lender may approve a short sale if: (1) the loan is delinquent, (2) the borrower can find an able willing buyer within 3 to 4 months willing to pay the then fair market value of the property, and (3) a new appraisal shows that the value of the property meets HUD program guidelines.
6. Deed-In-Lieu of Foreclosure.
A deed in lieu of foreclosure involves the voluntary surrender of the keys and title to the property to the lender in exchange for a release from all obligations under the mortgage. Some lenders will accept such a surrender, but others will not. A lender is less likely to accept a deed in lieu of foreclosure if there are other outstanding loans on the property.
7. File Bankruptcy.
The filing of a chapter 13 bankruptcy will trigger an automatic stay which will at least temporarily stop the foreclosure process and provide time to negotiate an alternative solution. Homeowners within 30 days of a foreclosure sale generally must utilize this option.
Regardless of the path you choose to embark on, seek legal advice from a licensed local real estate lawyer. A real estate attorney can verify that you are embarking on the right path, negotiate a deal for you, and/or at the very least, but most importantly, verify that the terms of any new agreement or loan presented to you are fair. You may shocked to know that this ounce of prevention probably won’t cost you very much and will in the long term be worth every penny.