With foreclosure being all the rage these days, I thought it would be prudent to include some tips on how to avoid foreclosure in the event that you are underwater on your mortgage or unable to continue making payments.
Luckily, mortgage lenders and servicers have stepped up efforts to help at-risk borrowers modify their existing mortgages, though not everyone in need is getting the help they need for obvious reasons.
Repayment Plans
This is the most common type of workout being offered via anti-foreclosure efforts like Hope Now. Under this type of workout, a borrower will have delinquent payments added onto the total loan balance in order to bring the loan current.
This isn’t exactly ideal, as you’ll be required to pay your typical monthly mortgage payment plus a certain percentage of the delinquent payment each month. Your lender or servicer will also likely ask for a down payment for a portion of the outstanding debt, and you’ll need to prove you can make the new payments.
Forbearance/Partial Claim
Forbearance is a situation whereby the lender or servicer forgives past-due payments to bring the borrower current. To make up for missed payments, the loan payoff schedule is extended by “x” amount of months depending on how delinquent the loan has become.
Deed in Lieu of Foreclosure
In this situation, the delinquent borrower essentially surrenders their property to the mortgage lender in exchange for forgiveness of all mortgage debt. The borrower is able to walk away, though they obviously lose all associated equity in the home.
Loan Modification
These are becoming more common, and are actually rivaling repayment plans now that the mortgage crisis has intensified. A loan modification actually alters the rate and terms of a loan. So if your current monthly payment is unaffordable, the lender may lower your rate to a more sustainable payment for a certain period of time. They may also reduce the principal balance under certain circumstances. This is probably the best solution to avoid foreclosure.
Refinance
This one only works if you’ve got enough equity in your home to actually qualify for a refinance. The problem is that most borrowers facing foreclosure are already underwater, meaning they owe more on their mortgage than the home is currently worth. If this is the case, a refinance won’t work. But if you’ve got a decent amount of equity in your home, a refinance could quickly solve your problems.
Pre-Foreclosure Sale
This is simply the act of selling your home before the lender is able to foreclose on your property. In this situation, you’ll typically sell the property for much less than it’s worth in order to avoid foreclosure and protect your credit rating.
Short Sale
A short sale is a situation where the lender agrees to let the delinquent borrower sell the property for less than the existing mortgage balance. The idea here is a lender may be better off taking a minor loss as opposed to a major one if foreclosure proceedings are actually completed.
Short Refinance
This is a new approach proposed in the federal housing bill that allows lenders to refinance a delinquent loan at a lower rate and reduce the principal. So even if a borrower is underwater, the loan can be refinanced to a sustainable payment and balance, often at or below 90 percent loan-to-value.
Loan Assumption
In some cases, it may be possible for a new borrower to assume the original borrower’s outstanding mortgage in exchange for the property in question. This can be difficult because you have to find a willing buyer and go through a rigorous underwriting process that can take several months.
Whatever option you choose, make sure you act fast. All of these solutions take time, so the more you wait, the higher the risk you have of losing your home to foreclosure. Call your lender or servicer as soon as possible if you’re unable to make your mortgage payments.