Are There Alternatives to Foreclosure?
Most mortgage companies will start the foreclosure procedures 90 to 120 days after you’ve missed a payment on your home. But foreclosure is a frustrating and expensive experience for lenders as well as borrowers, so mortgage lenders are likely to work with borrowers to provide alternatives to foreclosure. If they can avoid the process entirely and simply make good on the loan, they will probably do that.
Saving Your Mortgage
Work with Your Lender for Lower Payments
If you are behind on your payments you should work with your lender to come up with an alternative repayment plan that can help you make good on the mortgage. Lenders may not be willing to work with you on payments if they don’t think that you can make good on the mortgage. But if you have lost a bit of income—not a lot—then they might be willing to work with you. Extenuating circumstances, financial emergencies, and a good story for why you’re behind now but still make a good borrower for the future will help.
Modification or Partial Claim
Partial claim is a mortgage move where your insurance company that insures your mortgage lends to you to keep the house current. If your loan already has mortgage insurance attached to it, then the insurance company can lose a lot of money if you default. But the insurance company can make money if you are able to pay off the additional amount that they lend you. Not everyone will qualify for a partial claim, but it’s worth a shot.
Modification, on the other hand, is a direct change to the terms in your loan. While partial claim is an additional loan to pay off the current amount, modification is an actual change to your mortgage. Lenders may work with you for modification if you have a good credit history and are going through what they perceive to be a temporary financial crisis or difficult financial times. If your income will pick up or your financial situation will improve later, modification is a possibility.
Forbearance is a technical mortgage move that requires the approval of your lender. When you enter forbearance, you pay your regular payment plan plus half your mortgage payment for up to 6 months until you catch up on mortgage payments. Forbearance is a great option for people who struggle for a few months and then are able to make higher payments to catch up on the other end.
Forbearance can also help borrowers catch up who have had a permanent reduction in the amount of income that they are bringing home. Sometimes forbearance helps you get back on track, but other times it permanently changes the payment plan. You may pay a lot more on the house in interest in the long run. Carefully consider all forbearance plans before just accepting modifications to a mortgage plan.
Selling Your House
Forbearance is an acknowledgment that loan payments were tough for a few months, but now can be made in excess. A permanent hardship is a different kind of move, where you can no longer make the payments on the house at all. You may delay the foreclosure on the house during a permanent hardship for up to 120 days, but not indefinitely. Most people decide to sell their house during a permanent hardship so that they can recover a lot of the value that they’ve sunk into the home. Some lenders are willing to forgive the difference on the house between what it is sold for and what the mortgage costs.
Deed in Lieu of Foreclosure
If you think that foreclosure is inevitable and you want to avoid the messy, time consuming process of getting to that stage, you can submit a deed in lieu of foreclosure. A deed in lieu of foreclosure allows you to give the house back to the lender in exchange for total forgiveness for all your obligations. It is less damaging to your credit rating and allows you to move on quicker.
Deed in lieu of foreclosure can really help you avoid the vast, confusing space of foreclosure. It’s something you should consider if you think that there is no way that you can make payments on the house, even if the payments are adjusted.
If property values have gone down since the property was purchased, you can complete a short sale to recover less than the amount that you owe. Short sales can help you avoid the deed in lieu of foreclosure damage to your credit rating, but can also be a bit riskier to recover your full value.