Avoiding Foreclosure: Basic Workout Options

Here are some ways you can work with your mortgage servicer to avoid foreclosure.

If you're struggling to make your mortgage payments and facing a possible foreclosure, you might be able to work something out with your mortgage servicer. (A mortgage servicer is the company that handles your mortgage account. Learn more about what a servicer does.)

Read on to learn about some of the different ways you could potentially avoid a foreclosure.

Repayment Plan: Keeping Current and Catching Up

With a repayment plan, you arrange to make up your missed payments over time and stay current on your ongoing payments. This approach is usually the most feasible and easiest to negotiate with your servicer. For it to work, your income will have to be able to cover both current and makeup payments.

Example. Say you are four months behind on your payments of $1,500 a month, for a total of $6,000. Paying an extra $1,000 a month over the next 6 months would bring you current.

Repayment plans typically last three, six, or nine months. Servicers usually don't offer longer plans because most borrowers find it difficult to make larger-than-normal payments for an extended period of time.

Sometimes the servicer can approve a repayment plan immediately without asking the lender for permission. The longer it will take you to catch up, the likelier it is that your servicer will have to get permission from the lender.

Reinstatement: Getting Caught Up on the Loan

Many states give you, by law, the right to reinstate your mortgage (make it current by paying off the delinquent amount in a lump sum). Or your mortgage contract might give you a period of time during which you can reinstate and stop a foreclosure.

Redemption: Paying Off the Loan

In all states, you can redeem the loan (pay off the entire loan) before the sale. Some states give you a period of time after the sales date to redeem the mortgage by paying it off in full (plus interest and costs) or by reimbursing whoever bought the home at the foreclosure sale.

Forbearance: Getting a Break From Payments

Under a forbearance agreement, the servicer or lender agrees to reduce or suspend your mortgage payments for a period of time. In exchange, you promise to start making your full payment at the end of the forbearance period, plus an extra amount to pay down the missed payments. Forbearance is most common when someone is laid off or called to active military duty for a relatively short period of time and cannot make any payments now but will likely be able to catch up soon.

In forbearance, unlike a repayment plan, the lender agrees in advance for you to miss or reduce payments for a period of time. But both forbearance and repayment plans require extra payments down the line to bring the loan current.

Forbearance for three to six months is typical; forbearance for longer periods is less so.

Modification: Lowering Your Payments

Unlike repayment plans and forbearance, mortgage modifications are designed to lower your monthly payments over the long term and, often, bring you current on the loan. If you can’t afford your mortgage payment now, or won’t be able to in the near future, a loan modification is most likely the best approach to remaining in your house.

There are many reasons why borrowers might need a modification, including:

  • Their income stream was disrupted by a layoff or injury and a new job at the same pay is just not available.
  • Their interest-only loans caused the principal to reach a preset cap, which in turn dramatically pushed their monthly payment upwards to an unaffordable level.
  • Their interest rates reset higher.
  • Something happened in their life that required them to reprioritize their budget—for instance, a medical emergency or a child in trouble.

Here are some of the ways your servicer might modify a mortgage to reduce your payments:

  • Reduce your mortgage’s interest rate to the current market rate, if it’s lower than what you’re supposed to be paying now.
  • Convert from a variable-rate to a fixed-rate mortgage, which could bring the payment down.
  • Extend the loan’s repayment period—for instance, from 30 years to 40. This will bring down the monthly payment, but delay for many years the time when you can begin to build equity.
  • Reamortize the loan, which involves adding the amount of the missed payments to the principal balance and issuing a new loan at a new interest rate for a new period of time. Reamortization can result in an increased payment (for example, if the interest rate stays the same or increases) or a reduced one (for example, if the interest rate is reduced and the loan period is increased).

Refinancing Your Loan

Another possible option for keeping your house is to refinance your mortgage, perhaps under the federal Home Affordable Refinance Program or HARP.

Normally, refinancing is available only if you have equity in your home. But under HARP, you might be able to refinance even if you're underwater. With a HARP refinance, you could:

  • get a lower interest rate
  • get a shorter loan term, or
  • switch from an adjustable to fixed-rate mortgage.

One catch, though, is that you must be current on your mortgage payments to get a HARP refinance with no 30-day (or more) late payments in the last six months and no more than one late payment in the past 12 months. And refinancing through HARP might not reduce your payment by a lot, but it will help you avoid nasty interest rate resets that might be in your future under your current mortgage.

HARP is set to expire on December 31, 2018.

Short Sales and Deeds in Lieu of Foreclosure: Ways to Give Up Your Home

In a short sale, the lender agrees to let the homeowner sell the home to a new owner for less than is owed on the mortgage loan. In a deed in lieu of foreclosure transaction, a homeowner voluntarily hands over the home's title to the bank in order to satisfy the mortgage loan. (Get details about how short sales and deeds in lieu of foreclosure work.)

Getting Help

To find out if you're eligible for a repayment plan, forbearance agreement, modification, short sale, deed in lieu of foreclosure, or HARP, contact your mortgage servicer. If you need more information about different ways to avoid foreclosure or how to fight a foreclosure, consider talking to a foreclosure attorney or a HUD-approved housing counselor.

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