Conventional Loans and Foreclosure
Conventional loans are mortgages originated by a lender
that are bought by the Federal National Mortgage Association (FNMA or Fannie
Mae) or the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).
Often referred to as "Fannie Mae loans" or "Freddie Mac
loan", these types of loans require a borrower to exhibit good credit,
stable and verifiable income, and are originated by institutional mortgage
lenders.
When trying to prevent foreclosure on a conventional loan,
the borrower is limited only by the options his or her lender offers. It
is important to note that not all of the options listed below will be available
to a borrower in default. It is at the sole discretion of the lender to
offer alternatives to the borrower.
When deciding upon the options available to a borrower, the
lender will initially try to determine the cause of the default, the condition
of the borrower's financial situation, and how long the borrower will face the
financial set back.
Borrowers that face a permanent financial crisis through death,
divorce, or permanent disability and are unlikely to be able to support the
monthly mortgage payment will have limited options available. 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:
-
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.
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