Foreclosure Options

 

The following section outlines many popular options a lender will offer to a borrower in default.  It is important to remember that the lender may not want to work with a borrower.

Forbearance-Forbearance is an agreement between the lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time.  If a borrower is behind in his or her payment by $2,000, for example, the lender may allow the borrower to pay the money back through installment payments over six months.  The lender may decide, on the other hand, to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining balance owed in one lump sum.

The forbearance may be an oral agreement or written contract between the lender and the borrower.  Generally these agreements will not exceed more than 12 months.  

Loan Modification -A loan modification is a change in any of the terms of the original note.  This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender's discretion to assist the borrower through a temporary set back.  

Generally a lender will consider a loan modification when foreclosure is eminent and the borrower's income has been decreased or the borrower is unable to make the mortgage payments, but will be able to keep the loan current after the loan modification.  

Mortgage Refinancing-Mortgage refinancing is an option where the lender would allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a debilitating financial situation.  

Refinances are generally open to borrowers that face a temporary set back in their financial situation, have shown outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.  

Second Mortgage, Line of Credit-A lender may offer a second loan or junior lien to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan.  The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan.  Interest rates often rival credit cards and should be looked at with caution.  

A borrower may also be able to borrow money from his or her bank or against a 401K or pension to use to repay the deficiency and reinstate the loan.  Conditions may apply.

Sale of the Home-Selling a home is an alternative for borrowers that are unable to reinstate the loan and face eminent foreclosure.  This option allows a home owner to try to salvage his or her credit, pay off the loan, and retain any remaining equity in the home.  By informing the lender of this option, the lender may delay the foreclosure proceedings in order to allow sufficient time to sell the home.

In certain cases, the lender may allow the borrower to sell the home when the proceeds from the sale are not sufficient to pay off the existing loan.  This is known as a short sale.  A borrower should check with his or her lender to discuss this option.  Furthermore, the borrower may have to pay taxes on any loss the lender writes off from the short sale.  A borrower should consult his or her tax professional before agreeing to a short sale.

Deed-in-Lieu of Foreclosure (DIL)-A deed-in-lieu of foreclosure is a voluntary conveyance of title to the lender.  Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure.  In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage.

In order to qualify for a DIL, most lenders state that there must not be a second mortgage or junior liens on the property.  Home owners with market values in excess of the amount owed against the home (including normal closing costs) should consider selling the property before voluntarily conveying the home to the lender.