If you ever find yourself in a financial situation where keeping up with your mortgage becomes impossible, foreclosure may seem like a desperate and only solution. For example, maybe you lost your primary source of income or are faced with significant medical bills after an accident. However, keep in mind that it is the last resort for yourself and your mortgage lender.
In most cases, the lending institution prefers negotiating with the owners to receive some form of payment or avoid the legal hassle of foreclosure. They do not want to be responsible for the maintenance and costs associated with the property and are often willing to negotiate. However, the best policy is to be honest and proactive so you can find a solution before you find yourself too far underwater.
If you have already missed one or more payments, you will be working within a timeline since the mortgage lender is entitled to start the foreclosure process. Borrowers have the opportunity to reach an agreement with their lender or pay back any back-owed amount (including incurring fees) until the property goes up for auction, which can take several months from the moment you first miss a payment. However, once the auction is passed, you will lose ownership of the house in favor of the mortgage lender or highest bidder.
Here are some alternatives you might be able to negotiate with the mortgage lender to keep your home or avoid the trauma of foreclosure.
Refinancing
If you foresee some difficulties in the future (such as losing your job) but still have some leeway, the best option for lowering your monthly payments would be to refinance the property. Unlike a loan modification, which changes the original terms of your mortgage, refinancing consists of paying off the current mortgage and replacing it with a new one with more advantageous terms.
Refinancing will mildly affect your credit at first, but it will bounce back within a couple of months, and it may even help you in the long run. It can be a good solution if you need to change lenders. In some cases, refinancing allows you to tap into the equity you’ve accumulated on the house to get you through a rough patch using a home equity loan or home equity line of credit (HELOC). However, since it is a new mortgage, you will need to pay closing costs.
Loan Modification
If you have difficulties paying your monthly payments, you can reach out to your lender to see if you can change the loan terms. For instance, you can lock in a lower interest rate or extend the life of the loan. If your original loan was an adjustable-rate mortgage, you might qualify for a cheaper fixed-rate mortgage. In some cases, the mortgage lender may even accept a principal reduction.
Keep in mind that a loan modification will negatively affect your credit score, so you should avoid it if you have other options or are still current on your loan. Your mortgage lender can decide to accept or not the loan modification depending on your circumstances and their lending standards, and you must provide proof of hardship to qualify.
Forbearance Agreements and Repayment Plan
If your current difficulties are temporary – if you are out of work following an accident but plan to resume your activities, for example – you may be able to negotiate a forbearance agreement with your lender. It enables you to stop your payment for a set time (typically three to six months), giving you some time to recoup while the lender agrees not to start the foreclosure process in the meantime.
Once the forbearance agreement ends, you will need to pay your lender back by adding extra payments to your mortgage payments until the overdue amount is caught up. At this point, you can resume your regular monthly payments. You can also request to pay back the outstanding amount as a lump sum instead.
Partial Claim
If you have private mortgage insurance (PMI), the mortgage insurance company may lend you the money you need to bring your loan current since it is in their best interest that you keep the property. It essentially constitutes a second loan on the house since you will need to pay the insurers back, but it can give you the breathing room to keep the property.
The requirements depend on your mortgage insurance company, so reach out to them and see if you qualify and what would be the terms of the loan if you find yourself at risk of defaulting.
Deed in Lieu of Foreclosure
If keeping the house is not an option, it is best to cut your losses rather than go through the foreclosure process. Giving up the property voluntarily allows you to control the situation better, including negotiating more advantageous terms for your exit. You could also potentially avoid financial distress in the long run.
To do so, you may ask the mortgage lender if they will accept the deed to the property as a repayment for the remainder of the loan. In exchange, the bank agrees not to pursue any deficiency judgment that would hold you responsible for any remaining balance.
By giving up the property without putting up a fight, you avoid the red flag of a foreclosure on your credit report for the next seven years, although your credit score will still take a significant hit. Besides, the mortgage lender may be willing to offer some financial help, such as relocation assistance costs, so that you can find new housing more easily. It also transfers the responsibility of finding potential buyers to the bank, which saves you a lot of hassle.
Short Sale
During a short sale, the property owners must obtain their mortgage lender’s agreement to sell the property for less than what is still owed on the remaining mortgage debt. Depending on the terms, the lending institution may forgive the difference and remove the lien on the property. It is a complex transaction since the lender is an active part of the negotiation process, and the sale may fall through without their approval.
The homeowner must prove hardship to obtain their lender’s agreement to a short sale and the consent of any other liens holder. Although their credit score will be significantly lower, the stigma is lesser than a foreclosure.
Mortgage Assumption
If your mortgage lender and the terms of your loan allow, you may find another entity to take over the remaining payments on the loan while keeping the original rates, repayment period, principal balance, and so on. However, keep in mind that it may be risky since the mortgage originator may still hold the original borrower responsible for the loan if the buyer fails to meet their obligations depending on the terms of the transaction.
