If a foreclosure is staring you in the face, several strategies exist that might help you prevent a foreclosure. The options that work the best for the homeowner are forbearance, loan modification, and refinancing. Each of these has positive results for the homeowner, including the ability to retain possession of his home. The other two options include a short sale and a deed-in-lieu-of-foreclosure. Both of these options result in the homeowner losing possession of his home.
One of the first things that you can try is to seek forbearance or a delay in the obligations of the loan from the lender. If the lender is agreeable, you might be able to get a reduction in the monthly mortgage payment, a suspension in your payment schedule, or a temporary waiver of your back payments that are still due and payable.
The temporary reduction in payments might involve only the repayment of the interest due on the loan at that time. A suspension of payments means that you have a grace period during which you will not need to pay on the mortgage. An agreement is made between the homeowner and the lender as to when the payment schedule will go back into effect. Additionally, the homeowner and the lender come to terms with the repayment of any back payments.
Loan modifications implement simple changes into the terms of your loan that enable you to avoid a foreclosure. The changes are not only permanent, but also, they are advantageous for the homeowner. One of these involves the lowering of the interest rate that is currently being charged on the balance of your loan. Another involves extending the term of the loan. Both of these strategies result in smaller monthly payments.
If you qualify, you can refinance your existing mortgage so that you can pay it off in full. Getting a longer term and/or a lower interest rate on the new mortgage will reduce the size of the monthly payment. If your current lender isn’t amenable to the idea of refinancing, it might be necessary to use a different lender in order to refinance your loan. In both cases, you use the new loan to pay off the initial loan. Then, you begin to make the monthly payments on the new loan.
With a Deed-in-Lieu-of-Foreclosure, you sign over the rights to your home to the lender. The lender takes over complete ownership of the home and sells the property, pocketing the money. Depending on the actual sale, the lender might or might not get all of the money the homeowner owed on the mortgage. However, the homeowner gets nothing. Therefore, if you had any equity built up in the home, you lose it as well as the house.
A short sale saves you from a foreclosure, but you still lose your home. With a short sale, the home is sold for less than what you owe. The lender takes the money from the sale to cover part of your existing debt to him. Unfortunately for the lender, he also takes a loss on the amount that is owed. One of the potential problems for the homeowner with a short sale is the possibility of having to declare the difference between what he owes and what is paid to the lender as income. Plus, in some states, the lender is able to pursue a deficiency judgment for the difference. Even without those negative aspects, the homeowner still loses the home as well as any equity that he had built up in it.
Most lenders do not want the homeowner to lose his home. Therefore, they are generally open to some form of bargaining or compromise. As stated earlier, the best options for the homeowner are to attempt to acquire forbearance on the loan, a loan modification, or a refinanced loan.