Understanding Your Options
Depending on your goal and your situation, you may have several options available. Before deciding what option(s) to implement, you need to ask yourself one question:
Do I want to keep my home or get rid of my home?
The answer to this question will determine your course of action.
If you want to keep your home, these are your options:
Refinance: The odds of being able to refinance are slim to none. It is however a viable option. Just look out for predatory lending scams offering foreclosure loans.
Reinstatement: You pay the lender the entire past-due amount, plus any late fees or penalties, by a date you both agree to. This option may be appropriate if your problem paying your mortgage is temporary. If you have the ability to pay the full amount you are behind in one lump sum, you will need a written reinstatement letter from your lender. If one has not been provided, call and request one.
Government Programs: FHA Partial Claim (see below), FHA Secure(see below), FHA-Insured Loans (see below), Disaster Victims (see below), and Military Personnel (see below)
FHA Partial Claim: Available only for HUD loans. If your mortgage is insured, your lender might help you get a one-time interest-free loan from your mortgage guarantor to bring your account current. You may be allowed to wait several years before repaying this loan. You qualify for an FHA partial claim if:
- Your loan is between 4 and 12 months delinquent
- You are able to begin making full mortgage payments again
When your lender files a partial claim, HUD will pay your lender the amount necessary to bring your mortgage current. You must sign a promissory note, and a lien will be placed on your property until the promissory note is paid in full.
The promissory note is interest-free and is due when you pay off the first mortgage or when you sell the property.
To learn more about a FHA Partial Claim, dial… (800) CALL-FHA or visit www.fha.gov or www.hud.gov.
FHASecure (Refinance, FHA Loans only): You must fit the following 5 qualifications to be eligible for FHAsecure.
- A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset;
- Interest rates must have or will reset between June 2005 and December 2008;
- 3% cash or equity in the home;
- A sustained history of employment; and
- Sufficient income to make the mortgage payment.
For more information about FHASecure, dial… (800) CALL-FHA or visit www.fha.gov.
FHA-Insured Loans: Dial… (800) CALL-FHA or visit www.fha.gov.
Disaster Victims: If you live and work in an area that has been declared a disaster by the President… and the hurricane, tornado, flood, wildfire, or other natural or man-made event damaged your home or reduced your income, your lender will provide disaster relief:
- For 90 days on an FHA-insured loan.
- In most cases for other loans.
Military Personnel: CLICK HERE
New Foreclosure Relief Plan: Mandated as of December 5th, 2007.
You are eligible to have your interest rate froze for 5 years if you:
- Your loan had a low initial interest rate
- That is set to increase or…
- That has already increased and…
- You are currently no longer than 30 days behind and…
- You are not a subprime borrower and…
- You have not been more than 60 days behind in the last 12 months and…
- You cannot afford to pay your mortgage at the higher rate and…
- You can afford your mortgage at the lower rate.
For More Information, call (888) 995-HOPE
Negotiating: There are 3 common types you can attempt.
Repayment plan: Your lender gives you a fixed amount of time to repay the amount you are behind by adding a portion of what is past due to your regular payment. This option may be appropriate if you’ve missed only a small number of payments.
Effect of a successful repayment plan on your credit record: Minor to moderate, depending on how far you fell behind. Less than 30 days late will have minimal impact on your record; 30 to 59 days late will put a minor but noticeable mark on your record; 60 to 89 days is worse. If you fell behind by 90 or more days, but eventually caught up, your credit score will drop quite a bit. When you fall behind by 30 days or more, that is counted as a delinquency. Two or more delinquencies are worse than one.
Forbearance: Your mortgage payments are reduced or suspended for a period you and your lender agree to. At the end of that time, you resume making your regular payments as well as a lump sum payment or additional partial payments for a number of months to bring the loan current. Forbearance may be an option if your income is reduced temporarily (for example, you are on disability leave from a job, and you expect to go back to your full time position shortly). Forbearance isn’t going to help you if you’re in a home you can’t afford.
Forbearance is most commonly offered to disaster victims and people who have lost their jobs but who feel confident they’ll find well-paying employment quickly. After the forbearance period ends and you’ve resumed making monthly payments, the service will expect you to pay extra each month until you’re caught up. In most cases, you’ll be expected to catch up within a year or 18 months.
Effect of a successful forbearance on your credit record: Minimal to moderate, depending on the circumstances.
Loan modification: You and your lender agree to permanently change one or more of the terms of the mortgage contract to make your payments more manageable for you. Modifications can include lowering the interest rate, extending the term of the loan, or adding missed payments to the loan balance. A loan modification may be necessary if you are facing a long-term reduction in your income.
Less frequently, the lender will tack the missed payments onto the end of the loan. In other words, if you got a mortgage in June 2004 and it’s supposed to be paid off in June 2034, but you miss three payments, the lender could add those three payments to the back end and push the payoff date to September 2034.
Effect of a modification on your credit record: Minimal to moderate, depending on how far behind you fell on your monthly payments.
(Note: Before you ask for forbearance or a loan modification, be prepared to show that you are making a good-faith effort to pay your mortgage. For example, if you can show that you’ve reduced other expenses; your lender may be more likely to negotiate with you.)
Bankruptcy: Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy another home, get life insurance, or sometimes, even get a job. Still, it is a legal procedure that can offer a fresh start for people who can’t satisfy their debts.
If you and your lender cannot agree on a repayment plan or other remedy, you may want to investigate filing Chapter 13 bankruptcy. If you have a regular income, Chapter 13 may allow you to keep property, like a mortgaged house or car, which you might otherwise lose.
Chapter 13 Bankruptcy, rather than surrendering the property, a court approved repayment plan provides the homeowner the ability to cure the default over an extended period of time (30-60 months) while maintaining the current monthly payment. After you have made all the payments under the plan, you receive a discharge of certain debts.
However, this does not change the terms of the mortgage, and since the homeowner cannot afford the current regular monthly payment, they may not be able to afford the current payment plus the delinquency amount.
If you want to get rid of your home, these are your options:
Selling your home: Depending on the real estate market in your area, selling your home may provide the funds you need to pay off your current mortgage debt in full.
Your lender might postpone foreclosure proceedings if you have a pending sales contract or if you put your home on the market. This approach works if proceeds from the sale can pay off the entire loan balance plus the expenses connected to selling the home (for example, real estate agent fees). Such a sale also would allow you to avoid late and legal fees and damage to your credit rating, and protect your equity in the property.
Assumption: A qualified buyer may be allowed to take over your mortgage, even if your original loan documents state that it is non-assumable.
Deed in Lieu of Foreclosure: This option often is referred to as a “deed in lieu.” You voluntarily transfer your property title to the lender (with the servicer’s/lender’s agreement) in exchange for cancellation of the remainder of your debt.
This option might sound like the easiest way out, but it has limitations:
- You usually have to try to sell the home for its fair market value for at least 90 days before the lender will consider this option.
- This option may not be available if you have other liens, such as other creditor judgments, second mortgages, and IRS or state tax liens.
You will lose any equity in the property, and you may face an income tax liability on the amount of debt forgiven. A deed in lieu may not be an option for you if other loans or obligations are secured by the property on your home.
The lender can refuse to accept a deed in lieu of foreclosure, and it often does, for a couple of reasons. First, the lender has to incur the costs of fixing up the house and paying real estate commissions. A short sale is preferable. Second, the lender inherits any problems with the title. Foreclosure clears away many title problems.
Effect of a deed in lieu of foreclosure on your credit record: Severe.
Short Sale (Pre-foreclosure Sale): In a short sale, you sell the house for less than you owe – partial payment. You can’t do a short sale without the lender’s permission. Your lender may allow you to sell the home yourself before it forecloses on the property, agreeing to forgive any shortfall between the sale price and the mortgage balance. This approach avoids a damaging foreclosure entry on your credit report. You still may face a tax liability on the amount of debt forgiven. Consider consulting a financial advisor, accountant, or attorney for more information.
Effect of a short sale on your credit record: Severe, but far better than a foreclosure.
Walk Away: There is nothing more to say than this is the BIGGEST NO NO.
Doing so will haunt you for the rest of your life. It will follow you everywhere you go as there will be a constant mark on your credit report. You may have difficulty getting loans, finding employment, and everything else in-between.
