How to Stop a Foreclosure on Your Investment Property

If you're struggling to make the mortgage payments for your investment property, you might be able avoid foreclosure with one of these options.

If you’re having trouble making the mortgage payments on an investment property, like a single-family home that you rent out or an office building with tenants, you might be able to work out a way to avoid a foreclosure. Read on to learn more about potential workout options for investment property loans.

What’s an Investment Property?

An investment property is a property that is not your primary residence, which you bought in order to generate income, take advantage of particular tax benefits, or make a profit from appreciation. Different types of investment properties include rental properties, commercial properties, and property you buy to “flip” (resell and make a profit). (Learn more about the difference between an investment property and other kinds of properties.)

Workout Options for Investment Properties

You might be able to save your investment property from a foreclosure with one of the following workout options.

Arranging a Forbearance

A forbearance agreement temporarily postpones or reduces your mortgage payments during a certain period of time. The lender agrees not to initiate a foreclosure during the forbearance period.

Getting a Loan Modification

With a loan modification, the lender may agree to:

  • lower your monthly payment to a more affordable amount
  • reduce your interest rate, and/or
  • extend the amortization schedule.

Depending on your circumstances, you might qualify for a Flex Modification or a proprietary (in-house) modification.

Flex Modification program. If you have a Fannie Mae or Freddie Mac loan and you’re 60 or more days delinquent on payments, you might be able to modify the mortgage on your investment property through the Flex Modification program. The eligibility requirements to get this type modification are rather extensive and complicated, so call your loan servicer to find out if you qualify and to learn how to apply. (To find out if Fannie Mae or Freddie Mac owns your loan use the Fannie Mae Loan Lookup and Freddie Mac Loan Look-Up Tool.)

Proprietary modifications. Lenders sometimes offer proprietary modifications to borrowers who are having trouble making mortgage payments.

Refinancing Your Loan Through the Home Affordable Refinance Program (HARP)

If you have a 1- to 4-unit investment property, you might qualify to refinance your loan under the Home Affordable Refinance Program (HARP). HARP is available until December 31, 2018. (To learn details about HARP eligibility requirements, see One Way to Avoid Foreclosure: Refinance Under the Home Affordable Refinance Program.)

Selling the Property in a Short Sale

With a short sale, the borrower sells the property for an amount that’s less than the total debt owed. The lender agrees to release its lien on the property and to accept the proceeds of the sale in full or partial satisfaction of the outstanding indebtedness. (If the lender forgives some of the debt, the forgiven amount might be taxable.)

If the lender doesn’t forgive the deficiency, it might sue you for a deficiency judgment after the short sale, depending on the terms of the agreement. Generally, lenders are more likely to seek a deficiency judgment following the short sale of an investment property than with a residential property.

Working Out a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a transaction in which the lender agrees to accept a deed to the mortgaged property instead of foreclosing.

The borrower is usually released from liability for the debt with a deed in lieu of foreclosure. But if the property is severely underwater—the value of the property is significantly less than the total amount the borrower owes—the lender might require the borrower to pay part of the difference or the lender might retain the right to seek a deficiency judgment. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt.

Consider Talking to an Attorney

To apply for any of the workout options discussed in this article, you’ll need to submit what’s called a loss mitigation application to your loan servicer. Before sending in your application, consider talking to a foreclosure attorney who can review your financial information and options. Because negotiating an alternative to foreclosure for an investment property can be tricky, it’s often beneficial to employ the services of a qualified attorney to help you through the process and ensure that you fully understand all alternatives.

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