If no longer being able to make your mortgage payment is a reality for you, here are 6 of the most commonly practiced and accepted options for any homeowner in this position.
- Loan or Mortgage Modification. This is a good place to start when you feel the mortgage payment growing to a place you can no longer handle it. Whatever you do at this point, DON’T WAIT!! As soon as you know your mortgage is too much for you, contact your lender. Rest assured, the lender does not want your house. They are in the lending business, not the real estate business. They will work with you even when you are still current on your payments. With a loan mod, they may refinance the debt, extend the term of your loan or even reduce your monthly payments to an affordable level. Your loan could be permanently changed by adding what you’re not paying currently to the back end of the existing loan balance, lowering the interest rate, making an adjustable rate fixed, or extending the number of years you have to repay your loan. Why would the lender want to do this? It keeps them from losing the loan payments and gaining a house and, ultimately, they will make more from you over time because it will take you longer to pay off the loan. Why would you want to do this? This allows you to keep the house and keep your credit in tact. It gives you time to wait until the market turns around, house values begin to climb, and you can sell for a profit.
- Forbearance – An agreement between the mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose and the borrower agrees to a mortgage plan that will bring the borrower current on payments. A forbearance agreement is temporary. It is designed for borrowers who have current financial problems caused by unforeseen situations such as temporary unemployment or health issues. As with a Loan Modification, the lender may be able to arrange a repayment plan based on your current financial situation and may even provide for a temporary reduction or suspension of your payments. Unlike the Loan Mod, the payment arrangement is temporary and, at the end of the forbearance period, your payment will be higher because you will be catching up the past due amounts. Why would the lender want to do this? It keeps them from losing the loan payments and gaining a house and, ultimately, they will make more from you. Why would you want to do this? Because you are able to keep the house and keep your credit in tact. This gives you time to get another job, pay off debt, and get your finances in order.
- Short Sale – a transaction that allows you to sell your property for less than the amount that is owed to the lender. The goal is that the bank agrees to accept the proceeds as full settlement of the debt. Why would the lender want to do this? The foreclosure process is time intensive, costly, and state specific. Banks would rather just cut their losses and move on to replacing “bad loans” with “good loans”. Why would you want to do this? Your lender may forgive your mortgage debt completely according to terms in The Mortgage Debt Relief Act of 2007. Fannie Mae set the mandatory waiting period to re-establish your credit history to 2 years after the completion of a short sale. The waiting period after foreclosure is five to seven years.
- Deed-in-lieu of foreclosure – the lender agrees to allow you to voluntarily transfer the deed to the property to them. You can voluntarily “give back” your property to the lender if: (1) You are in default and don’t qualify for any of the other options (2) Selling your house before foreclosure has been unsuccessful (3) You don’t have another FHA mortgage in default. Why would the lender want to do this? They save the huge expense of foreclosure proceedings. Why would you want to do this? Again, this action may have less impact than a foreclosure on your ability to purchase another home in the future.
- Partial Claim – the lender accepts a one-time payment from the FHA-Insurance fund to bring your mortgage current if: (1) Your loan is at least 4 months but no more than 12 months delinquent and (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 will execute a Promissory Note to the U.S. Department of HUD 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.
- Pre-foreclosure sale – allows you to sell your property for an amount less than the pay off of your loan if your loan is at least 2 months delinquent. Most lenders allow 3-5 months for you to sell your house but some are now allowing longer. If you go beyond the agreed to time, your house will go to foreclosure.
- Bonus Option – Can you rent out your property? If you can put someone in who can afford the monthly payments plus say, $200 beyond what you need to cover your monthly costs of owning, this would allow you to move on and into a home you can afford without taking a loss on the property you own now.
Is a Pre-Foreclosure Sale the same as a Short Sale? Not according to Fannie Mae. For Fannie Mae’s purposes, a pre-foreclosure assumes that the borrower has been delinquent in paying the mortgage and the lender agrees to accept less to avoid the time and expense of foreclosure. A short-sale, however, can refer to situations in which the lender agrees to accept less than is owed even on a mortgage that is current.
Check with your lender to determine if you qualify for any of these options. There are also housing counseling agencies that can help you determine which, if any, of these options may meet your needs and assist you in interacting with your lender.
For more information, go to www.HUD.gov
What have you been able to work out?