Alternatives to Foreclosure — Legal & Financial Considerations
If you have fallen behind in making payments on your mortgage, the lender or mortgage servicer may move toward a foreclosure on your home. However, you should know that you may have certain alternatives to foreclosure. Some of these alternatives can help you save your home or at least buy time to move. Other alternatives will involve giving up on your home but will shield you from liability for any debt related to the mortgage. Before accepting a foreclosure, you should explore each of these loss mitigation options and any others that may be available in your situation.
Probably the most common alternative to a foreclosure is a mortgage loan modification. This is a permanent solution for a homeowner who is unable to keep up with monthly payments. A loan modification will involve reducing the monthly payment while likely extending the term of the loan and possibly reducing the interest rate. You will need to fill out an application for the loan modification, and the lender will need to approve it. Many modifications are proprietary, which means that they are offered directly through the lender. In other situations, certain types of loans or homeowners may be eligible for specific modifications. People whose loans are owned by Fannie Mae or Freddie Mac, for example, may be able to benefit from the Flex Modification program.
Forbearance Agreements and Repayment Plans
If you believe that your financial troubles will resolve in the near future, you can try to negotiate a forbearance agreement with the lender. This means that the lender will agree not to collect monthly payments from you or to collect reduced payments during a certain period, which is usually several months. You will need to catch up with these payments eventually, but this can help you save your home until your situation improves. Also, you can negotiate a repayment plan with the lender that allows you to catch up with payments that you have already missed based on a temporary hardship. The lender will add a percentage of the overdue amount to each of your monthly payments for a certain time.
Don’t Be Afraid to Negotiate
Lenders will usually be very willing to negotiate an alternative to foreclosure with a homeowner, since many alternatives are easier to manage than the foreclosure process.
Another, less common way to save your home is to take out a reverse mortgage to pay off the initial mortgage. A reverse mortgage is available only to people who are 62 years old or older and who have a substantial amount of equity in their residence. It provides them with monthly payments, a line of credit, or a combination. The loan will become due when they die, move out, sell the property, or breach their obligations under the mortgage terms. However, reverse mortgages can be subject to foreclosure as well. You also may lose a substantial amount of the equity in your home, which you may have wanted to preserve for future generations. This technique thus has significant downsides for most people and probably should be pursued only if other alternatives are unavailable.
Short Sales and Deeds in Lieu of Foreclosure
If you have decided that you will be unable to stay in your home, a short sale offers a way to avoid the foreclosure process, reduce the impact on your credit rating, and avoid any deficiency judgment following the sale of the property. In a short sale, the homeowner agrees with the lender to sell the home to a buyer for a price less than what they owe on the mortgage. The lender agrees not to pursue the buyer for the difference between those values, which is known as a deficiency. The main challenge in a short sale can be finding a buyer who is interested in paying a price that the lender will accept.
A similar technique for avoiding a foreclosure involves giving the lender a deed in lieu of foreclosure. Instead of selling the property, the homeowner simply transfers ownership of the property to the lender, which then sells the property on its own. Lenders may find deeds in lieu of foreclosure less attractive than short sales because this shifts the burden of finding a buyer to them. From a homeowner’s perspective, a deed in lieu of foreclosure has a comparable impact on their credit rating and debt.
Another way to get out from under your mortgage if you are content with leaving the property is to transfer the property to someone else and have them assume the mortgage. This means that the new owner of the property takes over all of your obligations under the mortgage, and the lender can pursue them for payments. However, if the new owner fails to pay, the lender still may be able to pursue you for any deficiency. In some cases, a due-on-sale clause in a mortgage will restrict or prevent an assumption of a mortgage, but federal and state laws have limited the application of these clauses.
The risk of foreclosure probably should not be your only reason for filing for bankruptcy if your finances are otherwise in a manageable condition. Bankruptcy is a drastic step to take that can have a negative impact on your credit for years to come. On the other hand, if your financial troubles are overwhelming, filing under Chapter 13 can be a way to save your home. Your debt on a mortgage is included in your Chapter 13 repayment plan. However, this strategy may not work for you unless you have enough income to keep up with your plan payments, which can be substantial if you have significant equity in your home.
Even filing under Chapter 7 can delay a foreclosure on your home. While the bankruptcy is pending, the court will impose an automatic stay on any collections efforts, which include a foreclosure. The lender may get the automatic stay lifted, though, which means that it can continue with the foreclosure. Filing under Chapter 7 will not permanently save your home, but at least the delay may give you time to find a new place to live.
Foreclosure Mediation and Loss Mitigation
Foreclosure mediation or loss mitigation programs may be another alternative to foreclosure, although they may only be available to those who have filed for bankruptcy under Chapter 13 in some districts.