Avoiding Foreclosure: Basic Workout Options

If you're struggling to make your mortgage payments and facing a possible foreclosure, you might be able to work something out with your loan servicer. For instance, you might be able to arrange a:

• repayment plan, negotiated after you've fallen behind in payments
• reinstatement, in which you bring the loan current
• redemption, where you pay off the total loan amount
• forbearance, usually prearranged before you fall behind (but not always)
• loan modification, negotiated either before you fall behind or after you're already delinquent on the loan
• refinance, typically arranged before you're behind in payments and if you have equity in the home
• short sale, where you sell the property before the foreclosure ends, or
• deed in lieu of foreclosure, in which you give the home to the lender.

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 work out with your servicer. For it to work, your income will have to be able to cover both current and makeup payments. 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 amount of time.

Example. Say you're four months behind on your payments of $1,500 a month, for a total of $6,000. Paying $2,500 each month (an extra $1,000 per month) over the next six months would bring you current.

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

Forbearance: Getting a Break From Payments

Under a forbearance agreement, the servicer or lender agrees to reduce or suspend your mortgage payments for a specific amount of time. In exchange, you promise to start making your full payment at the end of the forbearance period and repay the skipped amounts in a lump sum, in a repayment plan, or by completing a modification in which the lender adds the overdue amounts to the loan balance. Or you might be able to arrange payment deferral, where you pay the skipped amounts at the end of the loan.

Forbearance is most common when someone is laid off or called to active military duty for a relatively short amount of time and can't make payments now but will likely be able to catch up soon. Forbearance for three to six months is typical, though a longer period might be possible, depending on the lender's guidelines and your situation.

With a forbearance, the lender sometimes agrees in advance for you to miss or make reduced payments. With some kinds of forbearances, though, you don't have to be current on the loan at the time you get the forbearance.

Modification: Lowering Your Payments

Unlike repayment plans and forbearances, 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 monthly payment now or won't be able to soon, a loan modification is most likely the best approach to remaining in your house.

Some reasons why you might need a modification include:

• Your income stream was disrupted by a layoff or injury, and a new job at the same pay isn't available.
• Your interest-only loan caused the principal to reach a preset cap, which in turn dramatically pushed your monthly payment upward to an unaffordable level.
• The interest rate reset higher.
• Something happened that required you to reprioritize your budget—for instance, a medical emergency or a child in trouble.

Here's how your servicer might modify your mortgage to reduce the monthly payments.

• Reduce your loan's interest rate to the current market rate if it's lower than what you're supposed to be paying now.
• Convert a variable rate to a fixed rate, which could bring the payment down.
• Extend the loan's repayment period, for instance, from 30 years to 40, which will lower the monthly payment but delay the time when you can begin to build equity.
• Forbear some of the principal balance. ("Forbearing" the principal means setting aside a portion of the total debt before calculating the borrower's monthly payment. The borrower typically has to pay the set-aside amount in a balloon payment when refinancing or selling the home or when the loan matures.)
• Reamortize the loan, which involves adding the amount of the missed payments to the principal balance and usually issuing 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).