A homeowner in distress is not necessarily doomed to foreclosure. There are ways to avoid the devastation of foreclosure. Here are six methods of retaining ownership of a house in default or pre-foreclosure:
- Refinance: The borrower pays off the existing mortgage loan with the proceeds from a new loan.
- Repayment Plan: The borrower is allowed to catch up on missed payments by paying more than one full payment per month until the account is brought current. This is very difficult if the financial problem that led to default is anything more than a temporary glitch.
- Forbearance Plan: The borrower is allowed to suspend all or part of a monthly payment for a specified time period based on Bank agreement. The missed payments may be rolled into the existing balance, or become part of a Repayment Plan or Modification.
- Loan Modification: Allows for changes to the original terms of a borrower’s promissory note, which may include any combination of the following: an adjustment to the interest rate; an extension of the term of the loan; or an increase in the loan amount by the amount past due.
- Short Refinance: Allows the forgiveness of a certain amount of principal balance, in conjunction with Forbearance and a Repayment Plan.
- Bankruptcy: A borrower’s loan may be changed from the original terms based on a Loan Modification as part of a court-approved reorganization plan.
When Keeping the House Is Not Possible:
Unfortunately, when all other options fail, a distressed homeowner must face facts and accept the inevitability of losing the house. But foreclosure is still avoidable. There are still two options left.
A Short Sale occurs when a Bank agrees to take less than what is owed to settle the mortgage in full (a discounted pay-off) and releases its lien on the house upon a sale of the property. Because the homeowner owes more than the property is worth on the open market, the Bank may approve a sale for less than the debt and agree to this sort of arrangement to avoid a costly foreclosure. Full financial disclosure will be required to determine if the borrower qualifies for the short sale, and there usually must be some sort of recent hardship and an inability to pay, or impending inability to pay.
A Deed-in-Lieu of Foreclosure allows for transfer of a property to the Bank without going through the full foreclosure process. This is usually the “last resort” option, following failed attempts to sell or refinance. With that said, it is usually an option only after the short sale attempt has failed. The benefit to the Borrower is that this has slightly less of an impact on his or her credit rating than a foreclosure would. For the Bank, it shortens the process and therefore the costs associated with taking the house back and selling it to recoup debt. A Deed-in-Lieu of Foreclosure is done outside of a court and is a settlement of the entire debt. The settlement amount is generally the fair market value of the property. A Deed-in-Lieu of Foreclosure is a voluntary action and must be initiated by the borrower – the Bank is unlikely to suggest it. A Deed-in-Lieu of Foreclosure may not be the optimum solution for a homeowner in distress as it remains a black mark on credit for up to seven years and usually doesn’t address other liens for which the homeowner might be pursued even after the home is lost.