Keeping foreclosure at bay is very much like discovering cancer at an early stage. The earlier it is caught, the better is the chance of survival.
Very early in the default process, consumers can go still make it back from the brink since they won’t have missed more than 1-2 monthly payments. Of course, as the foreclosure process keeps moving along, the size of the delinquent debt owed adds up and the bank legal costs start to mount. Any borrower who tries to ignore their ugly financial situation will likely lose their homes.
As soon as you think you’ll be missing your first mortgage payment, you need to notify your lender. Say you’ve lost your job or a different type of hardship is being endured. They may give you some time to get your life back in order.
Lenders want to help
Lenders want to solve foreclosures nowadays. Mortgage servicers like Fannie Mae and Freddie Mac have attempted to boost loan “workouts” to reduce the number of home ending up being “Real Estate Owned” (REO). Workouts usually end up being a good solution since they usually cost thousands of dollars less than full foreclosures and home repossessions. It’ll keep lenders from going through the foreclosure process which can drag on for a year plus in some states. Nowadays, lenders motivation to work things out has given borrowers a better chance today of avoiding eviction than in the past.
The “workout” wheel usually starts turning when the borrower’s payment becomes 16 days late. The mortgage servicer will make an attempt to contact the borrower and figure out a way to make the payment current. After the first 30 days the payment is delinquent and the next month payment looks like it is in jeopardy, collection attempt will get more serious. At about 90 to 100 days, the servicer will refer the mortgage to an attorney to initiate the foreclosure process.
During the first few months, the servicer will offer the borrower 2 primary options to solve the financial situation by a repayment plan and loan modification. During a repayment plan, half of the amount of the first missed payment is added to each of the next subsequent two payments. The plans provide some breathing room for the borrowers with short-term financial issues.
Although, in a more serious case, the borrower may already missed 2 to 3 payments and owes a couple thousand dollars in lender legal fees. The mortgage servicer will still make an attempt to arrange a repayment schedule, but the borrower will probably have to pay a third to a half of the delinquent amount upfront and then pay off a portion of the remaining balance each month for a year or more.
Loan modifications go a step further and designed for borrowers who cannot afford the repayment plans. A modification involves the servicer adjusting the terms of the loan to make it more affordable by either lengthening the amortization schedule or lower the interest rate to decrease the monthly payment or they may roll the past due amount into the loan and re-amortize the new balance so the customer can pay the additional debt over time.
If the borrower has a more serious financial problem (i.e. losing a job but gets rehired for a job that pays much less), the servicer might help the borrower get rid of the house via a pre-foreclosure sale. In mortgage servicer will agree to a “short sale” which lets the borrower sell the house for less than the outstanding amount on the loan, take the proceeds and forgives the remaining overage. Banks will usually agree to these terms as they will often lose less on these deals than on a foreclosure.
Some lenders may also consider a short refinance, which has the lender agree to forgive some of the debt and refinance the rest into a new loan. The lender will still get more money than it would by foreclosing.
One last way of bailing out of a home is a “deed in lieu of foreclosure” agreement, which the borrower surrenders the property deed to the bank and it sells it.
No other solution
There are still some other choices. A debtor who can afford the normal monthly payments but cannot afford to make up the delinquent amount of legal fees may want to consider filing Chapter 13 bankruptcy. Doing so would temporarily halt the foreclosure process and force the lender to accept a more borrower-friendly repayment plan, that could grant five years to repay the amount rather than one or two.
On the other hand, borrowers who just need some additional time to sell their homes should consider refinancing via a “hard money” loan. They may be very high in rates and fees, they come from private individuals and can give people a couple extra months to find the buyers.
Remember the bank doesn’t really want your house. They would prefer to reinstate the loan back to the old terms. Try to negotiate the best deal. If the property has fallen in value below the mortgage amount, consider pushing for a short sale or short refinance rather than a repayment plan. That way, the borrower doesn’t have to pay more than necessary.