What are Your Options to Avoid Foreclosure

Before you sell your home, understand what options are available to you.

You should know that the federal government established loss mitigation programs to avert home foreclosures.  Most lenders will have their own established guidelines and procedures that will follow the direction that was designated by the feds. But, there are several options to avoid foreclosure listed below: 

Here are your Options to avoid foreclosure:

Forbearance Agreement

This is basically a repayment plan to catch up on missed payment(s) to avoid foreclosure.  Your lender may either suspend or reduce your payments temporarily.  To qualify for this loan, lenders will require a hardship letter that will must identify reasons for the default in payment. Your letter should state reasons such as involuntary reduction in income, illness, job loss, or increase in living expenses. In addition,  you will need to prove that you can meet the new established payment plan.  Usually credit qualifying is not a factor and qualifying quidelines are more relaxed and flexible.

Loan Modification

Due to the decline in market values, most homeowners are not able to refinance their loans, therefore, your lender may be required to extend the terms of your loan from a 30 year to a 40 year loan to help reduce the mortgage payments to a more affordable rate.  Most homeowners will qualify for this program when they can prove that their income was reduced prior to the default of mortgage payments.

Partial Claim

Homeowners that currently possess a FHA loan will qualify to meet the requirements of HUD for a partial claim.  This is an interest free loan that is HUD guaranteed to pay off the arrearages and reinstate a delinquent loan.

Any defaulted unpaid mortgage payments (aka arrearages) creates the use of  a promissory note that must be signed by the homeowner(s) and placed as a lien against the property.  As previously stated, the note is interest free, no monthly or periodic payments, and there are no pre-payment penalties attached.   The lien becomes due and payable when the homeowner sells or refinances the property.

There are 5 mandatory requirements in order to meet a partial claim program.

  1. The current loan must be at least 4 payments behind and not more than 12 months.
  2. The inability to qualify for a forbearance or loan modification program.
  3. The ability to make normal payments over a long term period.
  4. The ability to prove that financial distress is over.
  5. The homeowners must continue to reside in the current residence in livable and habitable conditions.

Short Sale

In today’s current market, this seems to be the route that most homeowners are taking.  Is it a viable solution?  It depends on how the lender and homeowner view their present positions.

From the homeowner’s viewpoint, a short sale means that the home is being sold at a reduced price (today’s current market value) for less than what is owed.  Example: the homeowner owes $300,000 the current market value is $210,000.  As a rule of thumb most lenders require a short sale to be 70% of the current balance owed, therefore a purchase price of $210,000 would be approved and accepted.  Some lenders may approve an amount for less depending on the condition of the property.  When the homeowner selects this option, his credit standing can be left somewhat intact for future purchases.  Read more by clicking here about the advantages and disadvantages of a short sale for the seller.

From the lender’s viewpoint, this allows them to recover part of their loss and takes it off their books

Deed In-Lieu of Foreclosure

This option allows the homeowner to voluntarily “return” the property and title to the lender.  The sale of the property is usually handled by the lender and sometimes is preferred rather than incurring the expenses of a foreclosure.  In many cases, it is no longer easy to get a deed in-lieu, because of second and third mortgage liens on the property. However, if this option is made available to you by your lender it may be an excellent choice to avoid foreclosure.

There are other solutions for avoiding foreclosure using the “Making Homes Affordable” programs that are administered by Freddie Mac.

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