Alternatives are available to help you avoid a foreclosure. If you want to keep your home, you might qualify for a loan modification, forbearance, or repayment agreement. Or, if you'd like to exit the property without going through a foreclosure, you might be able to complete a short sale or deed in lieu of foreclosure. And if the government owns or backs your loan, you might qualify for a special workout option.
Here are some foreclosure prevention alternatives to consider when you think foreclosure is on the horizon.
If you have enough cash on hand, you can reinstate your loan by making up all the missed payments, including principal and interest, plus fees and expenses. State law often gives homeowners a specific amount of time to reinstate.
Even if state law doesn't give you the right to reinstate, many mortgages and deeds of trust provide this right as part of the agreement. And more and more lenders are not eager to push ahead with foreclosure; they'd prefer to work something out with you. You might be able to reinstate up until the sale. To find out how long you have to reinstate, call your loan servicer.
If you aren't too far behind in payments, you might qualify for a repayment plan. With a repayment plan, you arrange to make up missed payments over time and stay current on your ongoing payments in the meantime. For the plan to work, your income will have to cover both current and overdue amounts. Typically, a repayment plan lasts three, six, or nine months, depending on the situation.
In a "forbearance agreement," the lender gives you permission to make reduced mortgage payments, or no payments at all, for a while. Forbearance for three to six months is typical, though a longer period might be possible, depending on the lender's guidelines and your situation.
You might qualify for a forbearance agreement if you're currently having trouble making the payments, but you can convince the lender that you'll be able to afford them in the near future. At the end of the forbearance period, you'll need to resume paying the regular amount plus extra to pay down the missed payments. Alternatively, you might be able to pay the skipped amounts in a lump sum, through a repayment plan, or the lender might agree to defer the skipped amounts until the end of the loan or to complete a loan modification (see below) and add the unpaid sums to the balance of the loan.
A "loan modification" is an agreement between the borrower and the lender to adjust the loan terms. The goal of a modification is usually to lower the monthly payment.
Typically, a modification involves:
As part of a modification agreement, the lender might also agree to set aside part of the unpaid balance as a "principal forbearance" that doesn't accrue interest. The set-aside portion usually becomes due in a balloon payment when the loan term ends.
If you can refinance at a better rate and pay off your old loan, you can start fresh. All states give you the right to "redeem" your mortgage by refinancing up until the time of the foreclosure sale. Some states even let you redeem after the sale.
Unfortunately, refinancing is very difficult if you have bad credit due to many late payments or a pending foreclosure.
If you want to keep your home, a Chapter 13 bankruptcy might help you accomplish this goal. You probably won't be able to use a Chapter 7 bankruptcy to save your home unless you're current on the loan and don't have much equity in the property. A Chapter 7 bankruptcy usually won't stop a foreclosure long term (unless you can get a modification). But you will likely get a delay of a couple of months until the lender can get relief from the automatic stay.
It's not a good idea to file for bankruptcy just to delay a foreclosure. But if you have many other outstanding debts that you can discharge (eliminate) through the process, filing for bankruptcy might make sense. Talk to a bankruptcy lawyer to learn the pros and cons of filing Chapter 13 or Chapter 7 bankruptcy during a foreclosure.
For some people, it makes economic sense to give up their house and move on. If so, there are a couple of ways to say goodbye to it; you'll want to choose the method that causes the least financial and emotional upset to you and your family.
If your lender agrees, you might be able to avoid foreclosure by selling your house for an amount that's less than your outstanding loan balance. This transaction is called a "short sale." If you live in a state that allows lenders to sue for a deficiency judgment after a short sale, you should try to get your lender to release you from repaying the deficiency in writing. Though, if the lender forgives the deficiency, you might face tax consequences.
You might be able to get your lender to let you deed the property over so that no foreclosure is necessary. This process is called signing a "deed in lieu of foreclosure." But before you go this route, you'll want to have an agreement (in writing) that the lender won't go after you for any deficiency (the difference between the home's fair market value and your outstanding debt) that remains after the house is sold. Again, you might face a tax liability if the lender forgives a deficiency.
Also, this option won't be available if you have second or third mortgages on your home.
Your lender or the current mortgage owner (called an "investor)" or the entity that guarantees your loan probably offers unique foreclosure alternatives. For example, special workout options are available if:
You should know if one of these agencies has purchased, insured, or guaranteed your mortgage because you will have been informed in writing. But if you don't remember and don't want to tear your house upside down looking for the paperwork, ask your housing counselor, servicer, or lender.
If you're facing a foreclosure, look into your options and don't wait to ask for help if you need it. Contact a HUD-approved housing counselor, who will help you for free, as soon as possible to explore different foreclosure avoidance options. Also, consider talking to a foreclosure attorney to learn more about your state's foreclosure procedures and what you should do in your situation.