FRS Properties

Six Ways to Prevent Foreclosure

Forbearance

In order to be granted a forbearance, you need to request from your current lender a temporary pause in your payments, if you can’t make a payment for a specific period of time due to unforeseen circumstances. When you’re not making your payments, a forbearance will also make sure that you don’t get any additional fees added on to your principal. If you’re able to obtain a forbearance agreement, always make sure that it’s in writing, and that the repayment of any payments missed are accounted for. You don’t want to get stuck with a lump sum payment of all the missed payments that you didn’t make at the very end of your forbearance period. The typical forbearance agreement will include a repayment plan which is usually a way to alter your current payments through a loan modification or an adjustment to your mortgage.

Loan Modification

Your lender makes an alteration to the mortgage, allowing you to restructure your loan and make reduced payments. Usually a loan modification reduces the interest rate, or could reduce the principal. It allows for you to make lower payments over the life of your loan due to a hardship, such as the loss of a job or a medical emergency. Lenders will typically review loan modifications so that they look at the terms of your loan and the circumstances; they may grant you a modification that allows you to pay a portion of your mortgage until a certain date in the future, after which the payments go up or the part unpaid gets added onto your principal. You’re going to need to repay those missed payments at some point in the future so be very cautious when you get a loan modification, because lenders are always going to dictate the terms of the modification, and at times they can be very burdensome with a huge balloon payment at the end of the term. Sometimes they increase the length of the loan to 30 or 40 years, or an even longer period of time. Always have a legal professional such as an attorney or a loan modification specialist look at the terms of your modification to make sure that you’re not surprised at the end of your modification. Be careful too if the lender gives you a principal reduction, because sometimes when you sell your home the amount of the principal that was reduced will be tacked on to the actual amount due at the time of the sale. Remember that big banks are only looking out for themselves, and they are going to hit you with whatever fees or whatever repayment terms that they think you can handle, so be careful when it comes to modification.

Reinstate/Refinance

This is rarely an option, in that the homeowner always needs to pay all their back payments and missed interest, and fees can be tacked onto the loan as well. It may be tens of thousands if not hundreds of thousands of dollars in order to reinstate a loan. Many times a homeowner will try to refinance their loan, but unfortunately most lenders will require you to have made twelve consecutive monthly payments in order to qualify for a refinance. If you’ve missed payments in the last year, that’s probably completely out of the question. One option may be that the homeowner obtains a private money deal (otherwise known as “hard money”), but interest rates can be extremely high and there may be points and fees associated with that as well. If you do get a hard money loan, that might be your last resort to avoid foreclosure, but be very careful who’s providing you that loan, because it may be extremely expensive in the long run. There’s a reason why some of those guys are called loan sharks.

Bankruptcy

Chapter 7 or Chapter 13 are typical for homeowners. Chapter 7 is a liquidation in which you need to sell all of your assets. The bankruptcy trustee will liquidate everything and take all the assets in order to pay creditors. Most people don’t want to do this. In contrast, Chapter 13 puts you on a repayment plan for the next three to five years. All of your debt is taken into account, gets compiled into one lump sum payment, and you pay all of your obligations; your mortgage, car payments, credit card payments, and any back payments or other debts that you may have. At the end of your payment term, whether it’s three years or five years, if you’ve made all your payments and you’ve been able to comply with all the terms of the bankruptcy, the bankruptcy will be discharged. Any debt that you have still on record will be eliminated. Chapter 13 bankruptcy is a way to postpone foreclosure. It allows a homeowner to figure out what they’re going to do in order to be able to make those missed payments. Homeowners can still be foreclosed on while they’re in bankruptcy. The lender can receive a “relief of stay” from the bankruptcy court, which will allow them to auction your property at the foreclosure sale, so bankruptcy may not lead to the best option for most people when it comes to avoiding foreclosure.

Equity Or Short Sale

Prior to the foreclosure date, in order not to lose all of your equity (if you do have some in your property) you can always sell the property. You’ll get whatever is left (after paying off the loan and fees) in one lump sum once the property closes escrow. If you owe more than the property is worth, you may need to do a short sale, which is when the lender takes less of the proceeds than they would normally get if you paid them in full. They do this because they don’t want to go through the foreclosure process. This allows you to not have a default judgment against you, and also allows you extra time and can provide you with some moving expenses as well, so that you can relocate from your current residence into another property. Most homeowners don’t want to sell their home, but at the end of the day a sale might be your best interest. Not only will a short sale give you more time, typically ninety days but possibly up to six months. When the short sale is completed the lender typically forgives any amount that’s owed that’s over the amount of the proceeds they get from the sale.

Deed In Lieu

Some lenders will allow you to deed them the property in lieu of foreclosure, so that they can avoid the long process of having to foreclose on the property, which could take months or years and cost thousands of dollars. The lender will typically not seek a default judgment, and then will allow the homeowner an additional thirty days, sometimes up to ninety days, to move out of the property. However, if there are any additional liens or judgements on the property that would cause the lender not to have clear title, they cannot do a deed in lieu of foreclosure. In this case, they would need to go through the foreclosure process in order to eliminate any second loans on the property, or any HOA loans or utility loans or those types of things that would cloud the title when they go to sell the property. This will not be an option for probably around 90% of homeowners.