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These options generally
involve the sale of the home or a deed-in-lieu of
foreclosure (the transfer of title back to the lender).
However, borrowers that are facing a temporary setback
but who will be able to continue making the monthly
mortgage payments in the future should qualify for
additional options that may include forbearance, loan
modification, mortgage refinancing, and additional loans
against the home to cover the cost of the default.
Forbearance
Forbearance is an agreement between
the lender and the borrower that reinstates the
delinquent loan through the payment of a lump sum or a
schedule of payments over a period of time. If a
borrower is behind in his or her payment by $2,000, for
example, the lender may allow the borrower to pay the
money back through installment payments over six months.
The lender may decide, on the other hand, to allow
the borrower to pay a reduced monthly payment until the
borrower has an opportunity to get back on his or her
feet and pay any remaining arrearages in one lump sum.
The forbearance may be an oral
agreement or written contract between the lender and the
borrower. Generally these agreements will not
exceed more than 12 months.
Loan Modification
A loan modification is a change in
any of the terms of the original note. This
includes decreasing the interest rate, re-amortizing the
remaining balance, extending the term of the loan, or
other options at the lender's discretion to assist the
borrower through a temporary set back.
Generally a lender will consider a
loan modification when foreclosure is eminent and the
borrower's income has been decreased or unable to make
the mortgage payments, but will be able to keep the loan
current after the loan modification.
Mortgage Refinancing
Mortgage refinancing is an option
where the lender would allow the borrower to refinance
his or her existing mortgage, wrap in any late payments
and fees, and cash out part of his or her equity in the
home to allow the borrower to regain control of a
debilitating financial situation.
Refinances are generally open to
borrowers that face a temporary set back in their
financial situation, have shown outstanding credit
history in the past, and can prove that he or she can
support the new mortgage payment.
Second Mortgage
A lender may offer a second loan or
junior lien to a borrower in order to make up any back
payments, late fees and other charges necessary to
reinstate the loan. The borrower, in return, will
be required to make an additional mortgage payment to
cover the principal and interest payments on the second
loan. Interest rates often rival credit cards and
should be looked at with caution.
Sale of the Home
Selling a home is an alternative
for borrowers that are unable to reinstate the loan and
face eminent foreclosure. This option allows a
home owner to try to salvage his or her credit, pay off
the loan, and retain any remaining equity in the home.
In certain cases, the lender may
allow the borrower to sell the home when the proceeds
from the sale are not sufficient to pay off the existing
loan. A borrower should check with his or her
lender to discuss this option.
Deed-in-Lieu of Foreclosure
(DIL)
A deed-in-lieu of foreclosure is a
voluntary conveyance of title to the lender.
Generally this is a last ditch effort by the borrower to
avoid the negative consequences of foreclosure. In
return for the voluntary conveyance to the lender, the
borrower is often released of any personal
responsibility for the mortgage.
In order to qualify for a DIL, most
lenders state that there must not be a second mortgage
or junior liens on the property. Properties with
values in excess of the amount owed against the home (to
include normal closing costs) should consider selling
the property before voluntarily conveying the home to
the lender.
Negotiating With Your Lender
As a borrower prepares to speak
with his or her lender, there are several key areas to
focus on before any interviews begin. As stated
before, the lender will try to determine a borrower's
eligibility to include the type of hardship, the status
of the property, and an evaluation of the borrower's
financial situation. Successful negotiations is
determined by preparation and good communication.
When preparing for the interview,
ask yourself the following:
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Why did I default on the loan?
Is it a result of just not making the payment or
have I suffered a verifiable loss of income.
Lenders will listen if you have had a verifiable and
temporary setback in income. The key is being
able to support your reasons for being late.
If the reasons are due to temporary layoffs for
example, send the lender a letter from your employer
stating that you have been laid off. If you
don't have a reason, you may limit your options.
-
Can I cut back on my expenses
anywhere? After looking at your income, the
lender will analyze your expenses. Do you
really need cable if you face the threat of losing
your house?
-
Can I sell an asset to
compensate for the deficiency or loss of income?
Do you have any assets that you are forced to make
payments on? Would selling the asset decrease
your monthly expenses and/or generate sufficient
cash to apply towards the loan? In some cases
a borrower may be able to sell a car, for example,
to reduce the monthly expenses by eliminating the
car loan. Also, any profits from the sale of
the asset could be used to bring the loan current.
-
Do I know anyone that could
loan me the money to get back on my feet? Do I
have any family members, relatives, or other sources
that could loan me the money. Though most
people are ashamed to ask, asking a family member,
friend or relative may be the only hope of saving
the family home.
-
Is it worth the effort to save
the home? Would it be easier to sell and start
over? In some cases a borrower may not be able
to handle the burden and stress of keeping the
house.
-
Should I file for bankruptcy?
When facing a financial crisis, a borrower will
often look towards bankruptcy as an option to
alleviate the problems. Before making a
decision, determine how bankruptcy will affect your
ability to keep the home.
-
If I were the lender, would I
justify the cause based upon the borrower's
situation? Though this is one of the most
difficult questions to ask, be realistic. If
you loaned someone $100,000 dollars, would you
believe his or her excuse for being late? If
not, you might want to reconsider your excuses.
Remember that lenders prefer to hear about temporary
setbacks versus permanent situations.
The lender will do a detailed
analysis of the borrower's financial situation and
scrutinize the reasons for the default A borrower
should compile the applicable paperwork including
letters from employers show a decrease income, bills and
receipts justifying an increase in expenses, and prepare
to answer the questions about the reasons for the
default. Knowing the situation allows a borrower
to talk effectively with your lender.
The second key to successful
negotiations with a lender lies in good communication.
Good communication is achieved by quick action,
immediate responses, and positive cooperation. If
a home owner knows that he or she is going to be late,
the borrower should call the lender. Ignoring
letters and phone calls from the lender actually
increases the likelihood that the home owner will lose
the home.
Once the home owner has begun a
dialogue with the lender, it is important that the
borrower responds to the lender's requests. The
home owner should create a diary of events and log every
call, letter, and meeting. He or she should
include the date, time, who called, the telephone number
and extension of that individual, and detail what was
spoken. The home owner should keep copies of every
letter sent to and received by the lender.
Furthermore, the borrower should emphasize his or her
desire to work out a solution to the default each and
every time the lender calls. If the cause for the
default has been resolved or will be resolved, the
borrower should assure the lender that his or her
problems are behind them and he or she is trying to get
back on their feet. The lender will generally be
more lenient and willing to work with a home owner if
the problem(s) are in the past.
Unlike government guaranteed or
insured loans like FHA or VA loans, the loan may have
private mortgage insurance. Private mortgage
insurance, or "PMI" as it is commonly referred to, is an
insurance policy that protects the lender against a loss
on the loan should it go into foreclosure.
Generally, mortgage insurance is only required on
conventional loans when the borrower finances more than
80% of the sales price when purchasing a home or
refinances into a new loan with an amount greater than
75% of the appraised value of the home.
If the lender is unwilling to work
a borrower, the borrower should contact his or her PMI
company requesting assistance. The PMI company may
be willing to offer additional solutions or alternatives
for a home owner rather than having to pay the lender
for any losses in the event of foreclosure.
Finally, the borrower should
remember to keep a positive attitude. Threats,
belligerent dialogue, and an unwillingness to cooperate
does not prove to the lender that the borrower is
serious about working out a solution. In addition,
the borrower shouldn't make promises that he or she
cannot keep. Though it may seem like an easy way
to stall a foreclosure, the borrower may end up with a
higher payment, owe more money than originally
delinquent, destroy his or her credit, and may lose the
house in the process.
Foreclosure is an expensive process
for both the home owner and the lender. However
lenders realize that foreclosure is an effective means
to demand payment from a home owner. A borrower
must be prepared and ready to face the consequences of
his or her situation. Knowing his or her options
and expectations of the lender are crucial to
successfully avoiding foreclosure.
However, there is free help and
assistance for home owner facing the possibility of
foreclosure. If you would like to talk with
someone about your situation,
click here.
Lower Your Monthly
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