When a homeowner gets behind in their payments, they usually don’t know what to do, so they do nothing. In fact, over 70% of homeowners do just that, absolutely nothing, and walk away from their homes. In reality, there are several options, with foreclosure being the last one. A quick summary of all the different options follow:
- Repayment plan (also known as Forbearance)
- Sell the Property
- Rent the Property
- Modification of the Mortgage
- Short Refinance
- Deed in Lieu of Foreclosure
- FHA and VA options
- Service members Civil Relief Act (SCRA)
- Short Sale
Often, the reason the homeowner got behind on payments was only temporary. The homeowner has to pay all the missed payments, any late fees and attorney fees in a lump sum payment. After the homeowner is caught up the loan continues as it was.
Sometimes the lender will take the missed payments, any late fees and attorney fees and divide them up over a payment plan or add the payments on to the end of the loan. The homeowner will usually need to show the lender why they would now be able to handle the repayment plan suggested by the lender.
The more equity a buyer has in their home, the more likely they will be able to sell the property and payoff the mortgage, and maybe even have something left over.
Some lenders may postpone foreclosure if they know the property is on the market or a contract is pending.
The homeowner has to live somewhere. However, if the homeowner can rent a different place for less, then rent the old home, close to the total mortgage Principal, interest, taxes and insurance payment, this could be a viable alternative.
Usually when a homeowner is behind on the payments and don’t have a job, it is tough to get a new loan. However, if there is enough equity, the credit has not been damaged too badly, and the problem that caused the late payments has gone away, then there is a chance a new lender will make a loan.
A lender may agree to a variety of modifications. Those modifications might include lowering the interest rate, extending the term of the loan, or adding the missed payments to the end of the loan.
A short refinance can involve a reduction of the principal amount and possibly even a lower interest rate. Usually the borrower still needs to show a hardship, but also the ability to pay the mortgage at the new payment structure.
This usually works best when the value is about the same as the mortgage amount. It is often called the “friendly foreclosure” since the borrower simply deeds the property back to the lender. Generally, this only works if there is just one mortgage and no other liens. In the settlement, sometimes the lender will forego any rights to a deficiency judgment.
Sometimes a bankruptcy will stop a foreclosure and allow the borrower to reorganize their debt and keep their property. By entering bankruptcy, it can make the property more difficult to sale or to negotiate a short sale. Personal bankruptcy is generally considered a last resort.
When a home owner is called to military service, and can show that call to duty has an affect on their ability to pay, and the mortgage was placed before the active service, there can be relief.
A short sale occurs when the loan on the property is greater than the value of the property. When an offer comes in on the property, the lender must approve the amount of the short fall. Often times there are so many investors involved in making the decision on the short fall, it can take an extraordinary amount of time to get the final approval.
Foreclosure finally comes about when the lender has filed the necessary paperwork and has served the Notice of Election and Demand. A sale date is then set 110 to 125 days from the NED recording date. After the sale date, there is no redemption period, and the homeowner no longer has any rights to the property.