Foreclosure can be complicated and traumatic for a homeowner, and once the process begins, options are limited.
Here are some of those options as outlined by the Mortgage Bankers Association and RealtyTrac, an investor-oriented service that follows real estate trends. This is not intended as legal advice. Talk with a mortgage counselor or lawyer to fully understand your options.
1) Renegotiation: This works best if you contact your lender early, before you get behind. The further behind you are or the deeper into the foreclosure process, the less they’re willing to negotiate. Los Lunas mortgage banker Dee Tomlinson and Valencia County bankruptcy lawyer Laura Boyett say that under current conditions few lenders have shown a willingness to renegotiate, but you should always talk to your lender as soon as there’s a problem.
2) Reinstatement: This is simple — bring your loan current, including any lender costs. This can be done quite late in the process, but is not a realistic option for most people because they simply don’t have the money. A similar option, called redemption, is discussed later.
3) Refinance: Getting someone to lend you money to redeem a home in foreclosure is virtually impossible under current lending policies. A mortgage modification under new federal rules might be a possibility, but Tomlinson and Boyett say their clients have had little success getting modifications.
4) Forbearance: Under this option, the lender postpones all or part of a borrower’s payments to provide time to fix the problem (like finding a new job), sell the home or find another solution. This could involve restructuring the loan, such as taking delinquent payments and adding them to the back end of the loan. Likely only available to those with a strong credit and payment history who have had a sudden and unexpected setback.
5) Redemption: Under this option, the homeowner pays off the loan in full by refinancing or getting a loan from family. In New Mexico, a borrower can redeem a loan up to nine months after the foreclosure sale. Obviously, the problem is finding someone to loan you the money.
6) Sell: A good option if you have enough equity to pay the loan in full. If you can’t get enough to pay in full, the lender might agree to a short sale and forgive the difference between what the home sells for and what you owe in order to avoid the costly foreclosure process. This is a difficult option because home sales are very slow. A short sale could come with many conditions from the lender and could have tax implications.
7) Deed-In-Lieu: Under a deed-in-lieu-of-foreclosure, the homeowner voluntarily gives the home to the lender without a foreclosure proceeding, saving the lender time and expense. The lender accepts the home as full satisfaction of the mortgage debt. A lender might first require the borrower to attempt to sell or refinance. Can have tax implications if the lender forgives part of the debt.
Bankruptcy: Not permanent, but once a borrower files for bankruptcy, foreclosure proceedings stop immediately. There are ways to save the home, but the bankruptcy judge decides if and how this happens. An attorney is required, and one should be consulted before making any decision about bankruptcy.
9) Foreclosure: Borrowers lose the home and any equity they have in it, even if the home sells for more than they owe. If the home sells for less, the lender can seek to recover the difference from the borrower. If the difference is forgiven, there can be tax implications.
Tomlinson and Boyett urge homeowners to avoid third-party “mortgage rescue” programs. Often these involve an investor loaning you money to catch up on your mortgage in exchange for a percentage of your equity or an interest in the home. Should you default, the investor takes over the home and mortgage for the cost of a few months of your payments. Should you sell, they get a much larger share of the sale than is warranted.
Both advise homeowners to first talk with a mortgage councilor or a foreclosure or bankruptcy lawyer, most of whom will not charge for an initial consultation. And above all, they say, don’t do nothing.