Solutions to Prevent Foreclosure
There are some common solutions for foreclosure prevention that include loan reinstatement, a forbearance agreement, or a loan modification. While there are other ways to prevent foreclosures, these three are used most frequently and are easiest to follow.
- Loan reinstatement, where a lender has started the foreclosure process and the homeowner finds a way to "reinstate" or pay back the entire deficiency owed. The Mortgage Company will add late and attorney fees in addition to the back payments making this amount significantly higher.
- A forbearance agreement between the lender and the homeowner which stipulates that the homeowner must make additional monthly payments for a specific period to make up the reinstatement amount based on his/her financial situation. This is mostly used in the instance of a tragedy or temporary loss of employment.
- A loan modification program which involves the lender issuing a new loan agreement where the deficiency amount is added to the loan balance and paid in identical monthly payments but for many more months. Another type of loan modification is to increase the monthly payments over the remaining term of the loan. So the homeowner has a choice of either extended but identical payments, or slightly higher payments for the original term of the loan. Either option repays the lender his money back plus interest.
A few additional options include:
- Refinancing where a new lender can give loans on mortgages that are in foreclosure if there is enough equity available.
- Partial Claim which is when you may qualify to have the repayment amount applied to the end of the current loan and resume normal payments.
- Sell Your Home before the foreclosure sale date. If you are unable to sell the home at the desired sale price then you may have to negotiate a short sale with your bank. In this case, the bank may be willing to take less than what you owe on the loan to avoid a lengthy and costly foreclosure process.
- Bankruptcy, which should be the absolute last resort and only filed when all other options have been exhausted. A bankruptcy will only save your home temporarily. If you miss or are late on one payment during the bankruptcy, your bank will foreclose on your home.
If your mortgage is invested by Fannie Mae or Freddie Mac, you may be eligible for assistance under the government’s new program called the Home Affordable Modification Program or HAMP. This program allows you to apply for assistance if you are facing a hardship and meet certain eligibility criteria. You can see if you meet the high level pre-qualification criteria for this program by visiting www.makinghomeaffordable.gov.
Note, that the options available to you will be dependent on the type of loan you have, what bank issued your loan, if you have mortgage insurance on your loan, and what company insures that loan. It is also important to review the laws of the state where you reside. For New Yorkers, Governor Paterson signed into law a bill in December 2009 that would provide extra protection to homeowners and tenants in New York and serve as a model for foreclosure mitigation. The new law builds upon a law passed in 2008 regarding subprime lending rules and protects New York neighborhoods and communities that have suffered as a result of declining property values and vacant homes turning into sites for criminal activity.
The new law calls for the following provisions:
- A 90-day pre-foreclosure notice to be sent to all home-loan borrowers. This allows extra time for many more homeowners to work with their lenders to find a solution without incurring foreclosures. Previously, a 90 day notice was required exclusively for sub-prime mortgages but the new law expands it to include all types of residential house loans.
- Lenders who serve a 90 day notice must notify the Banking Department within three days of filing the notice giving all details. This regulation would enable the Banking Department and Division of Housing and Community Renewal to assist the homeowner during the crucial pre-foreclosure grace period.
- Allow all home-loan borrowers to take part in a settlement conference.
- Tenants living in foreclosed units have to be notified in writing of any change in ownership. They would be allowed to continue living in their apartments or rented unit the lease term or 90 days – whichever covered a longer period of time.
- Require those who are awarded the right to foreclose and then sell the property to continue to maintain the property.
- Enhance consumer protections to prevent homeowners from predatory rescue scams and restrictions on upfront fees for brokers who seek to help the borrowers avoid foreclosure.