Foreclosure Prevention Options
If you are having trouble paying your mortgage, you have several options depending on your ability and interest in keeping your home.
When facing difficult financial times, your first step is to seek free debt counseling from a HUD-approved, non-profit housing counseling agency. During a housing counseling session, the advisor will take a comprehensive look at your budget and help you identify your options so you can make an informed decision on how to proceed.
Many times a homeowner facing financial difficulties may be nervous or intimidated about contacting their mortgage company. Counselors can help you contact your lender and they know how to help expedite the process. They can even help you gather the required documents (W-2 forms, pay stubs, credit report, etc.).
If you want to stay in your house, you may consider the following Retention options.
Repayment Plan - One of the simplest loan workout options is a repayment plan. You lender may agree to allow you to cure the deficiency by making the regular monthly mortgage payment, plus an additional amount to be applied toward the arrears. Repayment plans can extend from 2 to 18 months --- spreading out the arrears over a longer period. This enables a homeowner to catch up on their mortgage without undue hardship on their monthly budget. Servicers generally require a good faith payment up front, similar to a down payment, before they will agree to a repayment plan. The amount of this down payment varies, but is usually equal to a minimum of one month’s mortgage payment. A repayment plan may be a good option if the homeowner’s financial crisis has been resolved and they can afford to pay extra each month to catch up on their missed payments. For example, a repayment plan may be a good choice if the homeowner was unemployed for a period of time and is now re-employed.
Loan Modification - A modification is a written agreement that permanently changes one or more of the original terms of the loan, such as the interest rate, payment amount, maturity date or the amount of the unpaid principal balance. A loan modification may be appropriate when changes in the loan terms can reduce the monthly payment amount. Modifications must be in writing.
Forbearance - A forbearance is an agreement to suspend or reduce normal monthly payments for a fixed period of time. At the end of the forbearance period, the borrower must cure the delinquency through a lump sum payment or qualify for a long-term repayment plan. Forbearance may be a viable option if the borrower will be able to resume making payments by a specific date, and will have excess income to support a repayment plan.
Refinancing - Loan refinancing may be another option to lower your mortgage payment by lowering your interest rate or changing an ajustable rate to a fixed rate. Typically, refinancing has costs such as appraisal fees and application fees. If you're interested in refinancing, shop around for the best rate available.
There are also options available if it is in the family’s best interest to secure other housing arrangements. If a homeowner does not have the ability to maintain the payments, or is unable to resolve their financial crisis, the loan is considered incurable. If the loan is incurable, there are several Non-Retention options.
Home Sale - If there is enough equity in the house to cover selling costs, selling the property may be an option to consider. If you want to sell your home, work with a licensed realtor and expect the sales process to take some time.
Short Sale - A short sale is the sale of a home for a price that is less than the amount necessary to pay off the loan in full. The lender must agree to accept the proceeds of the sale as full satisfaction of the borrower’s debt. You are not permitted to sell the property to a family member, and may be asked to make full or partial payments while the property is being marketed. As a condition of the short sale, lenders generally agree not to seek a deficiency judgment. However, you are usually required to pay taxes on the difference between the total debt and net proceeds of the short sale, which is reported to the IRS as income.
Deed-in-Lieu - This option is when a borrower voluntarily gives their house to the lender in exchange for a discharge of delinquent debt. Lenders may consider a Deed-in-Lieu of Foreclosure when all other options have been exhausted. Most lenders require that the house be listed for sale for at least 90 days. As with a short sale, the difference between the market value and the total debt must be reported to the IRS as income.
A short sale or deed-in-lieu will have a negative impact to your credit report, and are generally reported as “Paid – Settled for Less than the Original Balance.” But these options are not as damaging to your credit as a foreclosure, which will appear as a public record for up to seven years. It may take a number of years after a foreclosure before lenders will consider you for another mortgage.