Options to Avoid Foreclosure
By Lisa Phillips
In today's market, foreclosures are on the rise. We see reports in the news daily
about the rising rates of foreclosures across the country. According to Bloomberg,
Fannie Mae Chief Executive Officer Daniel Mudd said "the housing slump will last
beyond next year, dragging down home prices and increasing credit losses. We don't
think we hit a bottom until the end of '08 and then we have some period of time
to work our way back up again.”
Many industry experts put the blame on “subprime” lending but we are now seeing
homeowners with “prime” lending loans also facing foreclosure. A financial downturn
can occur to anyone at anytime. If you are in financial trouble and cannot make
your mortgage payments you have options. You don’t have to lose your home.
The good news is that lenders do not want your home, they want your money and the
profits from your interest rate. If you are facing foreclosure act now by asking
your lender about the following options:
A loan modification permanently changes the terms of the original note. Mortgage
loan modification may include decreasing interest rate, re-amortizing the remaining
balance, or extending the term of the loan. Loan modification is also referred to
as a workout or restructure. One of the biggest advantages of loan modification
over alternative foreclosure options is that the interest rate can be modified to
lower your monthly payment to one that you can better afford. You will probably
have to request this option as lenders don’t like lowering interest rates because
it affects their profits. Another advantage of mortgage loan modification is that
it stops late payment reporting to the credit reporting agencies. It gives you a
new start much like a refinance. You may qualify if you have recovered from a financial
setback. When requesting a loan modification you will be required to provide financial
documentation along with a hardship letter stating the cause of your short-term
financial difficulties. The hardship letter may include unexpected medical expenses
or loss of income and also how those circumstances have now changed, such as a new
form income, etc.
Forbearance is an agreement between the borrower and lender that reinstates the
delinquent loan through the payment of a lump sum or a schedule of payments over
a period of time, usually no more than 12 months. The lender may add the amount
in arrears to the mortgage payment for a short period of time until the amount in
arrears is brought current. Depending on the circumstances, the lender may allow
you to negotiate a temporary suspension of your mortgage payments, setting aside
any payments in arrears or; the lender, may allow a reduction in the amount of your
mortgage payment. As with loan modification you may need to prove that whatever
caused your financial difficulty is short term and that you are now able to make
timely payments. The drawback of forbearance is that it does not preserve your credit.
Your mortgage payments will continue to be reported as “paid late” until you bring
current your total amount in arrears.
Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance
fund to bring your mortgage current. Your loan must be FHA insured.
1. Your loan is at least 4 months delinquent but no more than 12 months delinquent;
2. You are able to begin making full mortgage payments.
When your lender files a Partial Claim, the U.S. Department of Housing and Urban
Development will pay your lender the amount necessary to bring your mortgage current.
You must execute a Promissory Note, and a Lien will be placed on your property until
the Promissory Note is paid in full. The Promissory Note is interest-free and is
due when you pay off the first mortgage or when you sell the property.
The lender allows you to sell the house for less than the outstanding loan amount,
takes the proceeds and forgives any remaining debt. Your credit will not reflect
The lender forgives some of your debt and refinances the rest into a new loan.
Hard Money Loan
Refinance with a "hard money" loan. The interest rates and fees are extremely high
and usually involve a private lender. Normally a short term solution to buy you
time to sell your home or find more favorable refinancing terms while avoiding foreclosure.
Mortgage Insurance Claim
Your lender may be able to work with you to obtain a one-time loan from your mortgage
insurance fund to bring your mortgage current. You would be required to pay back
this loan to the insurance company over time.
Deed-in-Lieu of Foreclosure
As a last resort, you may be able to voluntarily "give back" your property to the
lender. You won’t be able to stay in your home, but it is not as damaging to your
credit rating as a foreclosure. This option is only available if there are no other
liens or judgments on the property.
Lisa Phillips is a marketing consultant specializing in business expansion and development.
Because many small business owners lack the personal and business credit necessary
to grow and expand, she has developed a free website to aid consumers as well as
entrepreneurs in rebuilding and taking control of their credit.