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Deed in
Lieu of Foreclosure: In this option the deed is
transferred to the lender in exchange for canceling the
mortgage debt. This option is good for the seller if there
is little or no equity in the home, but is not a good choice
when there is a lot of equity. This option is attractive for
lenders holding Michigan properties because it takes so long
for the foreclosure process to be completed and because
property values are on the rise. Even if there is a second
mortgage interest in the property, the first mortgage holder
may pay off the second interest in order to acquire the
property and resell it. With some loan products the lender
may be willing to pay the family a nominal amount to sign a
deed in lieu.
Forbearance: In forbearance, the lender schedules
increased monthly payments for the homeowner so s/he can
catch up the past due amount following a period where there
is a payment moratorium. Lenders often request 1½ times the
original payment amount, require a large up front payment
(which includes attorney fees), and most often want the loan
caught up in 12 months (in some cases 18 months are
allowed). The counselor must be very sure the owner can
afford to make the additional payment amount every month,
which may require a second job or another way to increase in
household income. With type two forbearance, the lender can
allow a moratorium from payments, schedule a time frame of
payments and then structure an advancement of claim or
partial claim to catch up the past due amount.
Modification: This option requires changing the
terms of the loan by reducing the interest rate or extending
the loan term. A modification may work better than a
forbearance or repayment plan for many customers
experiencing a financial setback, since the resulting
payment may be lower. There is usually a cost involved with
initiating a modification, which can often be rolled into
the loan. Modifications may be used with conventional and
government insured loans Past due arrears may be added to
the balance to cure the default, but late fees and
foreclosure fees must be paid another way (usually an out of
pocket expense to the borrower). The home owner must be able
to afford the new payment amount (debt to income ratio in
line with the loan product) and with some loans the
modification may need investor approval. Borrowers will also
pay processing and title search fees.
Pre-Sale: A foreclosure pre-sale allows the home
owner to sell the home for an amount less than the balance
due on a conventional loan. The private mortgage insurance
will often subsidize the sale, especially when the house is
in a negative equity situation. The seller must sell the
home for a price high enough to pay most of the mortgage
amount and fees, and the insurer will pick up the remaining
balance, sometimes releasing the seller from liability.
Borrowers must have experienced a permanent involuntary loss
of income and no other alternatives exist to cure the
default. Lenders/Servicers agree to this option when the
pre-sale will bring in a higher return than the foreclosure
will.
Partial
Claim: Used in the same manner as an advancement of
claim in conventional mortgages, the servicer can bring the
loan current by writing a check to themselves, with the past
due balance tacked on the end of the loan as a “sleeping
lien” for FHA mortgages. The homeowner will repay this lien
once the first mortgage is paid, and if the property is sold
prior to the mortgage being repaid, this lien will be paid
before funds are disbursed to homeowner. Partial claims are
usually considered only after foreclosure has been initiated
(that is, after the notice of sale has been sent to the
borrower). The borrower must demonstrate that the problem
that caused the default has been resolved, and will sign a
promissory note to repay the advance. HUD pays lenders a fee
to use this program, and HUD money is used to reinstate the
loan.
Refinance: Refinancing usually isn't one of your
options to stop foreclosure, because of mortgage payment
history and requires substantial
equity in the home, a good payment history, and a difference
of at least 2% lower interest rate to make the refinancing
fees cost effective. A type of refinancing tool known as a
“stream line refinance” is not as costly as regular
refinancing, as is available to government insured (FHA)
loan borrowers. This is where an FHA loan is refinanced with
another FHA loan that has different terms and that result in
a lower monthly payment. Interest rates can go up with a
streamline refinanced only if no closing costs are charged;
otherwise rates can decrease to current market rates. Terms
may be extended to 30 years or 12 years past the current
term, whichever is less. Borrowers must be two months or
less delinquent, and are allowed to bring in payments to
make the loan no more than two months behind.
Refunding: In a VA loan, the VA has the authority
to buy a loan from the lender and take over the servicing.
This happens rarely and only when it can be determined that
the home owner is only temporarily unable to make the
payments, will make them again in the future, and the lender
can no longer extend repayment flexibility (i.e.,
forbearance and modification cannot be used again).
Repayment Plan: This is when a borrower experiences
a temporary financial problem and a workout plan is
developed to reinstate the mortgage by adding additional
partial payments to the current payment. The borrower must
be able to afford the higher payment for the period
determined by the lender, and counselors should push for
repayment periods to be extended when the payment is
unaffordable. Many servicers will resist agreeing to
extension but are often able to do so without permission
from the lender or investor.
Rural
Development (RD) Loss Mitigation Options: Rural
Development loans have many foreclosure prevention options
for their borrowers built into their programs. Following is
a brief description of the options that may be available to
a customer with an RD loan:
• Delinquency Workout Agreements: Repayment
of delinquent mortgage amounts over an extended period of
time.
• Interest Credit Payment Assistance Subsidy:
Interest subsidies may be increased in order to make
payments more affordable during difficult financial times.
• Payment Moratorium: Monthly payment
reductions that can last up to two years, after which time
RD will recalculate loan to include remaining past due
amount. If payments remain unaffordable, some interest can
be cancelled.
• Protective Advance: RD will sometimes
advance money to pay for taxes or insurance and then
recalculate the loan balance and/or extend the payment
period.
Short
Sale: This is FHA’s comparable option to
conventional loans “pre-sale” situation. In a short sale or
pre-foreclosure sale, FHA will agree to share some or all of
the loss if the seller has a buyer that offers close to the
amount due. This way the lender remains relatively harmless,
and the homeowners credit report will reflect the loan being
paid in full. Home owners may request forbearance on a
delinquent loan in order to sell the home on the real estate
market. If the sale will cover all mortgage debt in full and
will happen before the foreclosure date, no approval is
needed. But if the foreclosure sale date is delayed or if
the sale will result in less than the total due on the first
or subsequent mortgages, approval from either the investor
or the second mortgage holder is usually required. The home
owner may also receive help with closing costs.
Straight Sale: One way to avoid foreclosure is to
put the home up for sale. Important in considering this
option is how far behind the payments are and how much
equity there is in the home. Many people are reluctant to go
this route because they are afraid that the foreclosure will
go through before the property is transferred to the new
buyer. The home owner must be willing to sell the home at a
price that will facilitate a quick sale. If a real estate
professional is involved, s/he must be willing to accept
less than the typical 7% total commission (buyer and seller
agents combined). The counselor will have to negotiate for
an extension or delay in the foreclosure process, and will
usually be able to be awarded extra time in s/he can prove
the home is listed with a real estate
professional.
Temporary Injunction: This is a court order that
will stop the foreclosure process. This is recommended only
when the foreclosure has proceeded past any hope of
modification, forbearance or other workout plan and when it
can be proved that the home owner’s financial situation has
improved to the point of being able to make payments and
catch up arrears. An attorney is required to initiate the
court proceedings and request the injunction.
If you need help
understanding your options to stop foreclosure, please call
one of our housing counselors.
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