Following is a brief explanation of these solutions, including their PROs and CONs:
Reinstatement
While a simple solution, a reinstatement it typically not a practical option. Just request the total amount owed to the lender to bring the loan current, and pay them.
- PRO: Does not require lender approval.
- CON: You need to be able to pay the entire amount due (back payments, penalties, and fees.)
Forbearance
A forbearance is a repayment plan. The homeowner negotiates a payment plan with the lender where they make up overdue payments over a time. This typically means making your current payment plus and additional amount towards the overdue payments you owe.
- PRO: Allows the homeowner to make back payments over time.
- CON: Requires that a homeowner be in a financial position to pay not only their current mortgage, but also a portion of the back payments owed. Some mortgage companies will require a homeowner to ‘qualify’ for forbearance.
Loan Modification
A loan modification involves the adjustment of one or more of the following: the interest rate, the balance of the loan, and the remaining term of the loan. The goal is a lower payment and possibly a lower loan balance..
- PRO: Lowers the payment and may reduce the principal balance of the loan
- CON: Homeowner still needs to qualify for the new payment and often requires significant documentation. Lender has to be willing to accept modifications.
Rent
Sometimes it may make sense for you to rent out your home and move somewhere more affordable. You may even be able to rent for enough to cover your mortgage payment. If the rent is less than the payment you would need to make up the difference.
- PRO: Allows homeowner to keep the home and minimize damage to credit. The are also tax benefits available to help offset some expenses. (Taxes, interest, depreciation.)
- CON: Often the rent won’t cover the payments. You will need to use a manager or manage yourself. You will be responsible for repairs and maintenance.
Deed in Lieu of Foreclosure
A deed in lieu means the lender is agreeing to let you turn over your home now rather than go through the foreclosure process. Prior lender approval is needed.
- PRO: A lender may be willing to give you a release from liability in exchange for your cooperation. This means the lender gives up their right to a deficiency judgment.
- CON: A deed in lieu may be reported to credit bureaus as a foreclosure.
Bankruptcy
Declaring bankruptcy is a very big decision that should only be made with a clear understanding of the implications. While in some cases it may be the only solution, it should be a last choice. t
- PRO: Can buy you some time to make other housing arrangements. No lender approval required.
- CON: Bankruptcy is expensive, severely damages your credit. You can only declare bankruptcy once every seven years.
Refinance
If your home is worth considerably more than you owe and your credit has not been damaged too much, you may find a new lender willing refinance your loan.
- PRO: You may be able to lower your payment. It can buy you time to try and sell the property.
- CON: You need to qualify and typically your credit is damaged due to late payments. There are costs involved. (Appraisal, title costs, attorney fees, etc.).
Service members Civil Relief Act (military personnel only)
Under certain conditions, members of the military experiencing financial distress due to deployment, may qualify for relief under the Service members Civil Relief Act. Assistance is available through The American Bar Association that will work with service members in determining if they qualifying for this relief.
- PRO: You can lower payments on all consumer debt in addition to mortgage payments.
- CON: Must be active military to be eligible.
Sell and Payoff Loan
If your home is worth more than you owe you may be able to sell it and pay off the loan.
- PRO: You avoid foreclosure and may even keep some of your equity.
- CON: It takes time to sell and often homeowners do not have enough equity to cover the mortgage and sales expenses.
Short Sale
When a homeowner owes more on their home than it is worth, a lender may accept a “short” payoff. This mean they will agree to take less than they are owed. You will need a real estate professional experienced and trained in distressed property transactions. The agent assists the homeowner through the negotiation of what is called a “short sale” with their lender. This typically requires the home be placed on the market first. The homeowner typically must demonstrate they have a financial hardship. A change in your financial stability between the time of the home purchase and now. Examples of some common hardships include: job loss or salary reduction, payment increase, divorce, medical situation, excessive debt, unplanned relocation, and others.
- PRO: You avoid foreclosure and even do less damage to your credit rating. No foreclosure means no public record or requirement to disclose on future credit applications. In many cases the lender will release you from liability and you avoid a deficiency judgment. You may be able qualify for another mortgage in as little as 24 months. .
- CON: Short sales are time consuming and can be complex. You need to be very patient. Work with a real estate agent trained in “distressed property” transactions and be very cooperative regardless of how frustrating and long the process may be.
This is only a summary of some of the options available to homeowners facing foreclosure. New solutions are evolving on a regular basis. Please call for a free confidential evaluation of your individual situation.
