Use these descriptions to help decide the best Bank Foreclosure Workout Solution for you!
Some lenders accept all of these solutions while others only accept a few. Select one or more of these foreclosure solutions that you feel will meet your needs and then check with your lender to determine if the plans are acceptable and which one they prefer to use.
Foreclosure Workout Solutions
FHA Special Forbearance
Recast/Modification or Capitalization
Partial or Advance Claim
Bankruptcy Chapter 13
Sale of the Home
Short Sale of the Home
Deed-in-Lieu of Foreclosure
Up 1. Reinstatement
This brings the loan current, including all arrears, late fees, impounds and attorney's fees by paying all arrears and related fees at once. Analyze your situation and consider these resources . . .
- Retirement 401K, or other type of retirement funds can be cashed out in an emergency. (you must weigh the tax and early withdrawal penalties against saving your home)
- Sell personal items such as a second vehicle, boat, or other major item.
- Borrow from friends, family, or church.
Up 2. Forbearance
The lender agrees to suspend your payments for a specific period of time. Before a lender will agree to this type of workout, you must demonstrate the ability to fully reinstate the mortgage within a realistic period of time.
Most lenders will grant a forbearance if you submit a letter explaining your circumstance and that you will bring the mortgage current when you receive: (inheritance, commission or quarterly bonus from an employer, recently court-ordered child support or other type of court awarded monetary settlement, tax refund and so forth)
Up 3. Repayment Plan
This lender-approved plan allows you to catch up on back payments. You must make regular payments while adding additional money to bring the loan current. (Usually over a period of months not to exceed 36 months)
Some lenders require an initial large payment and all lenders expect you to provide a budget analysis so they can see how much extra you can reasonably afford to pay.
Up 4. Federal Housing Administration (FHA) Special Forbearance
FHA allows a forbearance if you are up to the equivalent of twelve months in arrears including PITI. The lender may agree to suspend or reduce your payments until the hardship is over. The payback plan cannot exceed eighteen months.
Up 5. Refinancing
This is a new loan with either with the same lender or a different one. The refinancing process is identical to when you first purchased the home. Debt-to-income ratios, property appraisal, and credit history are all used in the approval process.
Be sure to calculate the cost of refinancing and make sure it does not include a prepayment penalty. Refinance Calculator
Up 6. Streamline Refinance
A streamline refinance is different from a conventional refinance because it is usually financed by the same lender/servicer. It is less expensive to originate, and is limited to the existing principal balance. There is no appraisal, and credit history is not usually a critical factor. The purpose of the streamline is to rewrite the terms of a loan to reduce the interest rate to the prime rate and/or lengthen the term of the loan. Streamlines will vary in cost, and guidelines may vary among different types of mortgages such as VA, FHA and Conventional. The benefit is to reduce the mortgage payment or absorb the amount of arrears to bring a loan current.
Up 7. Second Mortgage
Although a second mortgage may help you reinstate the first mortgage but it is not always be the best solution. Most homeowners become overextended with a second mortgage and use the available equity to consolidate other debts and then reuse or open other liners of credit thus ending up right back in debt.
Up 8. Recast/Modification or Capitalization
Recasting is simply placing the arrears at the end of the loan and continuing with the regular monthly payments until the principal balance is paid in full. It is rarely done without also modifying the loan. Modifying the loan means making possible changes to the interest rate or making some other change to the loan. It is less expensive than a streamline refinance and the existing loan is not paid in full. To qualify for this solution, your hardship would have to be over. It is particularly helpful when your net income is less than it was before the default.
Up 9. Extension
This option is not one in which the mortgage lender is necessarily involved. It is an option for homeowners who have auto loans. As a resource for freeing up monies to bring mortgage loans current, it may be possible to defer your auto loan payments for up to three months. You will need to contact your auto lender to inquire. Keep in mind that not all companies will offer this option.
Up 10. Partial or Advance Claim
This option is available for FHA loans, and conventional loans with mortgage insurance. If the hardship is over, but it is not possible to pay the arrears, the insurance company will consider paying the arrears for the borrower.
If the loan is an FHA loan, a lien will be placed against the property and payback will be required when the first mortgage has been paid in full, or you leave or sell your property. There will be no interest attached to this loan. However, if the loan should default at a later date, the amount paid will be subtracted from the amount required to make the lender whole. The loan must be at least four months, but no more than twelve months delinquent, not in foreclosure, and you must be able to make full mortgage payments.
If you have an insured conventional loan, the insurance company will usually request a payback arrangement immediately and charge zero to three-percent interest.
Up 11. Refunding
This option is for VA loans only. As a last resort, VA will buy back the loan from the lender, modify the terms of the loan either temporarily or permanently to allow the borrower to stay in the home.
Up 12. Bankruptcy Chapter 13
Bankruptcy is a legal process that may slow or prevent foreclosure. Chapter 13 is a personal financial reorganization under which consumers pay back their creditors, including mortgage arrears, under the supervision of a court appointed trustee. Usually a homeowner can pay back the arrears over 36 to 60 months. A lender may ask the court for a lift of stay, meaning that the mortgage may not be included in the bankruptcy, and if granted, the lender can then pursue foreclosure.
To File Chapter 7 bankruptcy is for unsecured debt only and will only stall a foreclosure thirty to sixty days. It liquidates most other unsecured debt, possibly providing enough financial relief to continue making mortgage payments.
If you want to remain in your home, consider recording a Homestead Declaration. Depending on your age, and the way in which title is held, this can protect between $50,000 to $125,000 of equity for up to six months after the sale of your home to invest in another primary residence before a judgement lien must be paid. Even if you do not currently have equity in your home, it is still wise to do this. As you pay down your mortgage and the economy improves, your equity will increase.
The following workout solutions for homeowners who want to avoid foreclosure but will have to vacate the home
Up 13. Assumptions
The Deed of Trust will indicate if a loan is assumable. If not, the lender may make an exception to allow an assumption to avoid foreclosure. An assumption is the transfer of liability on an existing mortgage loan contract from the original borrower to a new owner of the mortgage property, usually requiring qualification by the lender. If the loan is paid by the buyer without lender knowledge, it is considered taking the loan "subject to" the Deed of Trust and could cause the loan to be accelerated, and reflect adversely on the seller's credit. If the lender is notified and requires buyers to qualify for the loan, a release of liability is usually signed absolving the seller from future credit implication. The benefit to the buyer may be a lower down payment, and the benefit to the seller can be an increase of potential buyers.
Up 14. Sale of the Home
You may want to consider selling if there is equity in the property. The selling price must cover the arrears, the mortgage balance, agents fee and settlement fees, second mortgage, if any, and other liens that may be of record. Upon notification, lender may hold off foreclosure proceedings.
Up 15. Short Sale of the Home
This process allows a homeowner to sell a property for an amount less than what is owed to avoid foreclosure and preserve their credit rating.
The lender approves the sale based on a hardship. Be aware that the difference between the selling price and amount owed may be subject to income taxes.
This must be an "arms length transaction," meaning you cannot sell to a relative or close friend. FHA has set guidelines for short sales that have become the standard for all loan types. Generally, the requirements are:
- You must occupy the home;
- You must be at least three months in arrears;
- You have a documented hardship.
The term "short sale" is used for conventional loans. If your loan is FHA, it is called a Pre-Foreclosure Sale, and if you have a VA loan, it is called a Compromise Sale.
Up 16. Deed-in-Lieu of Foreclosure
If a sale is not possible, the deed may transfer to the lender in exchange for the cancellation of mortgage debt. HUD pays some costs involved for FHA borrowers, and credits them with $500.00. Using this option can possibly avoid some of the negative credit connotations associated with foreclosure.
This should not be done if you have equity, as it will be forfeited. The borrower may request this, but the deed-in-lieu must ultimately be accepted by the lender and must be the result of an unavoidable hardship. It will not usually be accepted unless a good attempt at selling the home has proven unsuccessful.