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Foreclosure Definitions and Terms

Use these foreclosure definition and terms to better understand the bank foreclosure process.

  1. Foreclosure Breach Letter
  2. Foreclosure Workout (AKA Loss Mitigation Agreement)
  3. Attorney Referral
  4. Junior Lienholders
  5. Special Relief Provisions
  6. Temporary Indulgence
  7. Liquidating Plan
  8. Special Forbearance
  9. Long Term Special Forbearance
  10. Military Indulgence
  11. Interest Rate Reduction
  12. Additional Forbearance
  13. Foreclosure Prevention Plans
  14. Repayment Plan
  15. Loan Modification
  16. Assumption
  17. Preforeclosure Sale
  18. Deed-In-Lieu of Foreclosure
  19. Forbearance (repayment plan)
  20. Modification (replacement mortgage)
  21. Modification Eligibility
  22. Assumption
  23. Preforeclosure Sale
  24. Deed-in-Lieu of Foreclosure
  25. Financial Disclosure Statement

Up 1. Breach Letter

The Breach Letter (sample letter) is a formal letter sent to you in an attempt by the lender to avoid foreclosure action. The lender hopes this letter will encourage you to contact them to work out an agreement called a "Foreclosure Workout".

Up 2. Foreclosure Workout (AKA Loss Mitigation Agreement)

The Loss Mitigation Agreement or Foreclosure Workout refers to the agreement that you work out with the lender to bring your loan current. If you do not work out a plan within approximately 45 days of the Breach Letter your case is normally referred to an attorney to file foreclosure action.

Up 3. Attorney Referral

The lender will refer your case (delinquent loan) to an attorney, usually with 90 to 120 days, who then files a petition in court to foreclose your mortgage and get the lender the right to sell the home to pay off the outstanding balance of your loan. The average time between attorney referral and the foreclosure sale varies by state. (State Listing)

Up 4. Junior Lienholders

These are also know as secondary or other lienholders. It refers to people who have a recorded lien against the property

Your primary lender may contact junior lienholders to determine the status of your loan with them. Once contacted these other lienholders may initiate separate foreclosure action to protect their interest pursuant to the terms and conditions of the mortgage or deed of trust.

Note: Separate action by junior lienholders does not usually prevent you from completing a Foreclosure Workout Agreement with your lender. Because it's to their advantage, most lienholders readily agree to participate in the workout solution . .

Up 5. Special Relief Provisions

Fannie Mae provides Special Relief Provisions that attempt to span periods of financial hardship that cannot be resolved by delinquency counseling or with a simple workout plan. Most lenders follow Fannie Mae's lead and do not object to any reasonable workout plan provided it does not compromise the lien position or come into conflict with any other policy or commitment.

Relief Provisions are normally offered when a delinquency is the result of a temporary condition, such as illness, unexpected expenses, or military service, and there is a reasonable chance the borrower can bring the mortgage current. During the term of a Relief Provision the property will be subject to scheduled inspections.

Up 6. Temporary Indulgence

A grace period, usually 30 to 60 days that may be granted to allow you to bring the mortgage current.  If requested, you will have to demonstrate evidence that you can bring the loan current such as proof that you . . .

Have a contract for the sale of the property and a closing date.

Have an insurance settlement or one pending.

Have or are pending an approved funding from another source.

Have an approved "Relief Provision" completion date.

Up 7. Liquidating Plan

This option allows additional proceeds to be added to the the regular monthly payment after the hardship has passed and the borrower can resume regularly scheduled payments.

Fannie Mae, HUD and VA policy allows most any creative solution agreed to under a Liquidating Plan that will remove the delinquency in the shortest amount of time.

Up 8. Special Forbearance

The suspension of payments for a specified period of time, usually no more than 18 months from the date of the first payment under this agreement.

At the end of the suspended period the borrower may be expected to resume payment under a Liquidating Plan. This plan is used to assist borrowers experiencing a temporary loss, or reduction, in income that is expected to be restored at a later date.

Most lenders provide Special Forbearance in any situation for which there is documentation and relief is warranted.

Up 9. Long Term Special Forbearance

In certain situations Special Forbearance can be extended up to 24 months.

Up 10. Military Indulgence

If you had a mortgage as a civilian and then later entered the military, you may be entitled to Military Indulgence granted under the terms of the Soldiers' and Sailors' Civil Relief Act. There are two components of this provision:

Up 11. Interest Rate Reduction

This requires the lender to reduce the interest rate to 6% from the time the borrower begins active duty to the date of release. However, just entering the military is not enough, you must show that your income was significantly reduced as a result of entering active duty and that this has caused your financial hardship.

If you qualify, this benefit is retroactive to your date of enlistment.

Up 12. Additional Forbearance

In certain cases related to the financial hardship usually associated with the loss of greater civilian pay the veteran may request special consideration in the form of a reduction in the monthly mortgage obligation. The difference between the scheduled payment and the reduced payment is referred to as arrearage by Fannie Mae.

Upon release from active duty the borrower is responsible for bringing the arrearage current.

Note: Most lenders will not normally foreclose on a delinquent borrower that has been granted Military Indulgence. In fact, it is Fannie Mae's policy to offer the borrower Additional Forbearance in this situation. If you cannot make payments you should seek a court order granting a stay of the mortgage obligation until you're released from active duty.

Up 13. Foreclosure Prevention Plans

In spite of your best efforts to bring your mortgage current, sometimes we face temporary financial setbacks. Rather than foreclose most lenders would rather work out a solution that protects their profit interests. Fannie Mae has created five specific plans that practically all lenders administer.

Up. 14. Repayment Plan: A structured arrangement in which the borrower repays delinquent installments or advances to bring the mortgage current. This formal plan may include Special Forbearance

Up 15. Loan Modification: One or more of the terms of the loan are changed to bring the delinquent mortgage current

Up16. Assumption: An enforceable "due-on-sale" clause is waived to allow a qualified buyer to assume the mortgage of a delinquent borrower.

Up17. Preforeclosure Sale: The proceeds of a sale are accepted as full satisfaction for the mortgage obligation even if it is less than the mortgage balance. (more)

Up 18. Deed-In-Lieu of Foreclosure: The borrower voluntarily deeds the property to the lender to avoid foreclosure.

Up 19. Forbearance (repayment plan)

The formal Repayment Plan and it is based on the Special Forbearance provision and is the preferred workout option because it is the least costly workout alternative. It is usually considered when delinquency is the result of;

The death of a contributor to the monthly mortgage payment and this does not necessarily have to be a person on the mortgage; or

Illness, catastrophe, or natural disaster for which the borrower is not insured; or

Any similar or contributing factors. Repayment plans may be customized to fit most any need or solution, however they cannot exceed 24 months. (see Special Forbearance)

Up 20. Modification (replacement mortgage)

This is a change to the terms of the mortgage in order to remove a delinquency and avoid foreclosure. Modification includes reducing the interest rate, extending the term of the mortgage, negative amortization, replacing an adjustable rate with a fixed rate and capitalizing the delinquent payments.

Modification is appropriate when the potential for a Repayment Plan is needed due to a permanent or long term reduction in income. Other Lienholders having a recorded interest in your property must agree to subordinate their interest to the new loan.

A particularly attractive workout solution if you have sufficient equity in the property to pay-off junior liens using the new loan.

Up 21. Modification Eligibility

You may qualify for loan modification if you are experiencing a permanent or severe financial hardship.

Normally your obligation-to-income ratio should not exceed 36-38%. Divide your total debt by the remaining term of the loan (more than six months) by your total income. This will give you a close estimate however, if the ratio is greater than 50% your plan is not likely to be approved.

Up 22. Assumption

The transfer of ownership to a buyer willing to assume full responsibility for the mortgage obligation.

While some loans, including most adjustable rate mortgages (ARM) are assumable without prior approval or buyer qualification, many others contain a "due-on-sale" clause allowing the lender to require the full amount to be paid in full.

Note: Fannie Mae will waive existing, enforceable "due-on-sale" clauses on conventional mortgages (fixed rate or fully amortized) in order to complete a sale and avoid foreclosure.

Up 23. Preforeclosure Sale

In order to avoid foreclosure, the lender and borrower agree to accept the proceeds of the sale to satisfy a defaulted mortgage even if the sale results in less than the mortgage balance.

In order to be eligible for this option you must be experiencing financial hardship as a result of involuntary reduction in income and an unavoidable increase in expenses that exceed income. Unavoidable causes include:

  • Lay-off or loss of job
  • Disability, or prolonged illness
  • Death of a mortgage contributor
  • If self employed, a business set-back

You will have to accept the following conditions:

  • Listing the property for sale will not delay initiating or continuing foreclosure action, but the terms of the agreement will be honored pursuant to a sale before the foreclosure date
  • You agree maintain the property
  • You agree to off-set any of the lenders losses (usually negotiable)
  • You may have a tax liability if any of the debt is forgiven.
  • The property is free of liens. If other liens exist, the lender must agree to the workout pursuant to the eligibility requirement for an assumption
  • The lender retains the right to negotiate and approve the transaction.

Up 24. Deed-in-Lieu of Foreclosure

You avoid foreclosure by voluntarily surrendering the property by deeding it to the lender as satisfaction for the debt. It is appropriate when . . .

  • The property has been on the market as a Pre-foreclosure Sale for three or more months .
  • There are legal obstructions to foreclosure action
  • Deed-in-lieu allows the lender to take possession of the property sooner than would be possible through foreclosure.

You may be eligible for this option if you meet certain hardship requirements outlined in this document and all junior liens are removed.

Up 25. Financial Disclosure Statement

A formal part of the workout plan that outlines your income and assets. It will be used by the lender to determine if you have assets which can be applied to the delinquent balance. (See Case File for in-depth information)