Avoiding foreclosure
A pending foreclosure is stressful and confusing. Owners should contact their lender to see whether a loan workout option is available.
If the problem is temporary, options include Forbearance. A lender may allow a borrower to reduce or suspend payments for a short period of time, after which another option must be agreed on to bring the loan current within a specified time period. A forbearance option is often combined with a reinstatement, especially if the borrowers know they’ll have enough money to bring the account current. The money might come from a hiring bonus, an investment, an insurance settlement, or a tax refund.
Reinstatement. Lenders may be willing to discuss accepting the total amount owed to them in a lump sum by a specific date.
Repayment plan. A borrower might be able to forge an agreement with the lender to resume making regular monthly payments, in addition to a portion of the past due payments each month, until the loan is current.
If the problem is long-term, options include Mortgage modification. If the borrower can make at least some of the payment on the loan but doesn’t have enough money to bring the account current, the lender might be willing to permanently change one or more terms of the original loan to make the payments more affordable. Examples include:
- Adding the missed payments to the existing loan balance
- Changing the interest rate, including making an adjustable rate loan into a fixed-rate loan
- Extending the number of years to repay the loan
Claim advance. If your mortgage is insured, you may qualify for an interest-free loan from your mortgage guarantor to bring your account current. The repayment of the loan may not start for several years.
If keeping the home isn’t an option, alternatives include Sale. The lender will usually agree to a specific amount of time to find a purchaser and pay off the total amount owed. The borrower will be expected to obtain the services of a real estate professional to market the property aggressively.
Pre-foreclosure sale or short payoff. If the property’s sales value isn’t enough to pay the loan in full, the lender might accept less than the full amount owed to cut its losses. This option can also include a period of time to allow the borrower’s real estate professional to find a qualified buyer. A pre-foreclosure sale could provide additional funds to pay other lien holders and a few moving costs.
Assumption. The lender might agree to permit a qualified buyer to assume the mortgage payments, even if the original loan documents state that it’s nonassumable.
Deed in lieu. The lender might agree to allow the borrower to voluntarily “give back” the property and forgive the debt. Although this option sounds like the easiest way out, the borrower must generally attempt to sell the home for its fair market value for at least 90 days before the lender will consider this option. Also, this option may not be available if the borrower has other liens, such as judgments by other creditors, a second mortgage, or IRS or state tax liens.
Source: U.S. Department of Housing and Urban Development (www.hud.gov)
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