Foreclosure is frustrating experience for most homeowners, especially those who don’t know where to turn for help. Banks and creditors seem to call at all hours of the night, you receive fliers in the mail nearly every day, and your credit score falls through the floor. But not all is lost. There are a few options for even the most desperate cases and if you can learn to use even just one of these eight techniques you may be able to save your home from foreclosure.
1) Reinstatement
This technique is the quickest way to stop foreclosure and it involves making up any back payments owed to the bank, and promising to continue forward with your loan in good standing. The easiest way is sometimes also the hardest way, and the most expensive. Depending on your lender, reinstatement may require you to pay any fees associated with the back payments, which might include late fees, capitalized interest, recording fees, documentation fees, and even legal fees. Often times, these fees can be waived if it means getting the loan back in good standing, so if this is an option for you make sure to request such a change from your lender before completing the reinstatement. Reinstatement is an option throughout most of the foreclosure process and in some states it can be performed even after the foreclosure sale through what’s called a redemption period.
2) Mortgage Forbearance
A forbearance is asking the bank for special consideration, usually to skip payments, due to some financial hardship. Before a bank will agree to a forbearance you’ll have to prove the hardship; it’s not enough to just claim it as so. Typical hardships include lost job or lowered wages, hospitalization or increased medical bills, and the death or sickness of family members. Forbearance usually results in the bank allowing you to skip a payment or two, which could be enough to get you through the lean times, without terribly affecting your credit or standing with the bank. Forbearance is best achieved before your loan payments go late and well before you risk going into a foreclosure situation. If you think you might soon face a scenario where your loan payments may be tough to make call the bank immediately and explore this option.
3) Loan Modification
A loan modification occurs when the bank agrees to modify your loan by creating a new loan agreement with lower payments and different terms. Loan modifications are also done for borrowers who display a financial hardship, similar to forbearance. However, the range of financial hardship allowed in loan modifications is typically more broad, and includes modifying loans that are unaffordable for borrowers, loans that exhibit higher debt to income ratios, and loans knows as predatory loans, which feature higher than normal interest rates. The government has led the charge with loan modifications by standardizing the qualifying guidelines that bank follow in determining whether a loan modification will be approved or not. Through its Making Home Affordable Program, the government sets the rules for the Home Affordable Modification Program (HAMP), the Home Affordable Refinance Program (HARP), the Second Lien Modification Program, and the Home Affordable Foreclosure Alternatives Program (HAFA). Loan modification can be an arduous journey, sometimes taking months or even years to complete. Loan modification includes a financial analysis and new loan underwriting to determine the level of loan payment that would be affordable for the home owner/borrower. The actual loan modification will usually result in a new loan with lower interest rate and lower monthly payments. To achieve this goal, the new loan may capitalize old loan interest, have a longer term, or higher amortization.
4) Pre-foreclosure Sale
A pre-foreclosure sale occurs when the borrower sells her property privately before the lender holds a public auction. A pre-foreclosure sale is an option when the borrower can sell the property for an amount higher than the existing remaining loan balance, and can therefore payoff the lender in full. Lenders usually prefer this option to foreclosure because it saves them money that would normally be spent taking back the home through the foreclosure process. It also saves time and brings the bank’s investment back sooner than foreclosure. Paying the lender back anything less than the full amount owed is considered a short payoff.
5) Short Payoff
This is when the bank agrees to be paid off an amount less than the outstanding principal balance of the loan. To complete a short payoff, payment is usually requested by the lender in one lump sum, in cash or in the form of a new loan from another lender. A short payoff will be approved by the lender when taking the property through foreclosure would be likely to result in a lower amount of returned principal.
6) Short Sale
When the property is worth less than the remaining outstanding balance on the loan the owner can attempt to sell the property short. This means when the property eventually sells, the lender will be returned an amount of money less than what is actually owed on the property. This is similar to a short payoff, except in this situation the borrower is selling the home to raise the funds necessary for loan payoff, as opposed to refinancing the mortgage or making a cash lump sum payment. Short sales are only approved if the lender believes it will net less cash upon a foreclosure, and usually only after the borrower displays a financial hardship or a significant loss of market value in the property. With a short sale, the lender has to approve the purchase and sale agreement, which can take some time, but this is a good option for some sellers who have a marketable home.
7) Deed in Lieu of Foreclosure
For those who can’t make payments at all and don’t care to live in the property anymore they can offer the bank a deed in lieu of foreclosure. With a deed in lieu of foreclosure you are giving the title to the home back to the bank, which transfers the property in its entirety to the bank. This saves the bank time and money of having to actually go through the foreclosure process to gain the right to take title back to the home. This allows the bank to speed up the sale of the home and recoup its investment sooner. Like a short sale, the bank must approve the transaction before a deed in lieu can be completed. The deed in lieu process can take anywhere from a few days to a few months, but is usually a quicker process than either short sale, foreclosure, or loan modification.
8) Bankruptcy
This is the last resort for borrowers behind in loan payments. To declare bankruptcy means you are insolvent, or simply put, your liabilities (what you owe) outweigh your assets (income and property value). This is a legal proceeding administered by the courts, which puts the borrower on a payment plan and decides which creditors are repaid and which aren’t. Bankruptcy is a legal action which requires the help of a qualified, licensed attorney, and could become a costly endeavor. Bankruptcy may stop a foreclosure permanently, or just delay it. Depending on the type of bankruptcy declared, your credit report could be marked for up to ten years, seriously limiting your ability to obtain any form of credit in the future. Check with your lender if you have questions about bankruptcy.
In most cases your lender will work with you to resolve any loan issues you might be facing. The lender wants to get your loan payment not your property. If you are currently behind in payments, or think you might soon get behind, make sure to call your lender immediately. The further behind you get the fewer options you will have available, and the bank will have less incentive to work with you in resolving the issue.
Remember, communication is key. If you’ve employed one of these eight techniques to avoid foreclosure you’ll likely need to submit new paperwork to the bank and wait for underwriting. Stay in contact with your lender as often as possible, and if your situation changes in the meantime, make sure to let the bank know that as well. Also, when dealing with any legal action or possible tax consequence, be sure to contact a qualified licensed attorney and/or tax professional.
If foreclosure has become a possibility, your best move is to start gathering facts and reviewing your options in preparation for making a plan of action. The longer you wait to act, the fewer option you have available to you to help in your efforts to keep your property. However, methodical, well-researched and well thought out action is crucial. Rushing to act in a panic mode can end up causing you more harm than good.
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