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Home >> Lending >> Home Mortgage
Options for Avoiding Foreclosure for Serious Delinquinces
If you are seriously behind on your mortgage, options exist to help you avoid foreclosure. As with any banking problem, your first step should be to contact your lender as soon as possible. However, below are some options that may be available to you depending on your financial situation and your repayment history. These options are designed for people who will be unable to repay their mortgages: people who have suffered from permanent hardships rather than a borrower who is temporarily unable to pay but should be able to resume payments in a set amount of time.
Some of these options are more extreme than others. As with anything, you and your banker should look to find the least intrusive method of avoiding foreclosure.
Deed-in-lieu of Foreclosure
The most severe option to avoid foreclosure is when property owners can no longer afford to make payments, nor do they plan to resume payments. A deed-in-lieu (DIL) of foreclosure would require the homeowner to sign the deed to the property over to the bank. You would no longer own your home, but in exchange, the bank would cancel out any remaining debt. If the bank cannot sell the home for the amount you owe, then you would not be responsible for the debt. If a foreclosure happens instead, once the bank sells the property, you would remain responsible for any unpaid debt. The advantage of a DIL over a foreclosure is obvious. Additionally, a DIL would allow you to avoid having a foreclosure reported to the credit bureaus, which would drastically affect your ability to finance property in the future. Your credit report will most likely reflect a DIL occurred, but the effect will be less than a foreclosure.
A DIL is your best option if you no longer reside in your property, and you are currently attempting to sell. Most banks would recommend you attempt to sell the property on your own for 60 days or more, so that you have some chance of recovering any equity you have in the home. If, however you can't sell the house after a 60 day period, a DIL may be your best option to avoid foreclosure.
Short Refinance
A short refinance is for you if you are in a negative equity position and struggle to make payments. The short refinance would allow you to eliminate an upside down mortgage with your current lender so that you can negotiate a new mortgage based on the current market value with a second lender. Your current lender might forgive the amount of your loan over the current market value. Lenders might do this to avoid the cost of foreclosure, which can be rather expensive. However, this shouldn't be confused with a mortgage modification, which is discussed below. A mortgage modification means the borrower stays with the same lender, while a short refinance means the borrower must find a new lender.
Simply, a short refinance means your lender reduces the payoff so a new bank will take on the mortgage. However, the downside to a short refinance is that you are forced to find another lender to take on the debt. Depending on your credit rating and job status, this could be difficult, but if you are successful, then you will be able to stay in your home, avoid foreclosure, and perhaps, reduce the cost of your overall mortgage debt.
Mortgage Modification
Mortgage modification may be your best choice if you still live in the home, want to pay the mortgage back, and have the ability to make smaller payments. A mortgage modification simply alters the terms of your current mortgage. It is more flexible than the other options because the bank can lower your payments, defer any past due amounts, offer partial loan forgiveness, extend the repayment terms, or even change the interest rate. The bank might make these decisions after looking at your financial situation and your repayment history.
This option would allow you to keep your house, bring your payment status to current, and avoid marking your credit history with a foreclosure. However, when attempting to get a mortgage modification, you must be honest with the bank. If you can only afford 30% of your payment, then tell your lender. A modification won't help you if the bank is unaware of your true financial status.
Most of these options depend on whether you want to keep your house and actively pay on your mortgage. If you no longer want the house, a DIL or short sale is your best option. Remember, that foreclosure alternatives are individualized. Only you and your lender can decide which option is best for you after a thorough review of your finances and your payment history.
Published on BankingQuestions.com 10/14/08
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