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. Read on to learn about some of the different ways you could potentially avoid a foreclosure. (To learn what to do—and what not do—if you’re facing a foreclosure, see Foreclosure Do's and Don'ts).

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.

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.

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 can't 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; though a longer period might be possible, depending on the lender’s guidelines and your situation.

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.
• 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 portion 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).

(To learn what to do, and what not to do, in the modification process, see Do's and Don'ts for Getting a Loan Modification.)