Homeowners who are behind on their mortgage payments and facing foreclosure are not at the mercy of their lender. There are several viable options which homeowners may use to avoid foreclosure.
Forbearance
Forbearance is an option for homeowners who are facing short term financial problems. A forbearance agreement is a negotiated remedy whereby a borrower who has fallen behind on his mortgage payment is allowed to bring his mortgage payments current over a short period of time, usually six months to a year. Most forbearance agreements require the borrower to pay 20%-30% of the delinquency at the beginning of the forbearance period.
Loan Modification
A loan modification is also a negotiated remedy. A loan modification makes a loan more affordable for a borrower by permanently changing at least one of the loan terms. Generally, a loan modification might entail one or more of the following changes to the loan terms:
- Reducing the interest rate;
- Changing the interest rate from an adjustable to a fixed rate;
- Extending the term of the loan;
- Adding the arrearage amount to the principal balance; and
- Reducing the principal balance of the loan to the present market value of the property.
Deed in Lieu of Foreclosure
In some instances, a borrower and lender may agree that the best option is for the borrower to transfer title to the property to the lender. This transfer is effectuated by execution of a deed in lieu of foreclosure. A borrower must obtain a lender’s consent before executing a deed in lieu of foreclosure. There may be certain tax and legal consequences associated with a deed in lieu of foreclosure.
Short Sale
A short sale is another negotiated remedy that is frequently used by homeowners to avoid foreclosure. A lender in a short sale scenario agrees to accept less than what is actually owed on the mortgage in order to assist the homeowner in the selling the home. Like a deed in lieu of foreclosure, a short sale may have tax and legal consequences.
Bankruptcy
Bankruptcy is the only option for avoiding foreclosure which, at least temporarily, prohibits a lender from foreclosing. The automatic stay becomes effective the moment a homeowner files bankruptcy and prevents his or her lender from moving forward with foreclosure proceedings. A lender may only proceed with a foreclosure after obtaining authorization from the court.
Getting Legal Help
These are only a few of the options available to homeowners who are facing foreclosure. Each option has pro and cons. Therefore, before utilizing any of these foreclosure avoidance options, a homeowner should seek the advice and representation of an experienced foreclosure defense attorney.
