Options For Distressed Home Owners
Stay In The Property
1. Cure/Reinstate – If you are behind on payments, you are considered “in default” with your lender. At any time prior to foreclosure, you have an opportunity to cure the default, which is called “reinstatement” of your loan. You have from the time the notice of default is recorded until the time set for the foreclosure auction/trustee sale to make up any back payments, late charges and other costs that may have been incurred by the lender to bring your loan back into good standing.
2. Conventional Refinance – At all times before the foreclosure sale/auction actually takes place, you have an absolute right to “pay off” your loan that is in default. You have from the time the notice of default is recorded until the time set for the foreclosure auction/trustee sale to make up any back payments, late charges and other costs that may have been incurred by the lender to bring your loan back into good standing. In most cases, this pay off of the defaulted loan occurs through a sale of the property or refinancing of the property with a new lender. In today’s housing market, it may be difficult for you to secure a conventional refinance of the loan because of the damage to your credit from the foreclosure or because you have little or no equity in your property. Even if you are able to secure a refinance, the terms of the new loan may be burdensome and the interest rate very high. In this situation, the property may need to be refinanced a second time once your credit improves to obtain a loan with more favorable terms. Otherwise, the loan terms of the new loan are usually too expensive and your home may end up going back into foreclosure again.
3. Equity Loan – Equity lenders are commonly referred to as “hard money” lenders. A hard money loan is not based upon the credit worthiness of a borrower but is usually made solely based upon the equity in the subject property. The availability of this type of loan would require substantial equity in the property. In most instances, the amount of money being loaned would not exceed 65-75% of the fair market value of the property. Equity loans are very expensive. Points paid to obtain this type of loan are usually between 4-8 points and interest rates can range between 12-21%. This type of loan should only be used as a temporary measure to stop the foreclosure and give you additional time to complete conventional refinancing of the property or to list and sell the property. Many times the primary advantage of an equity loan is that it can be made very quickly and without the normal time delays of a conventional loan. Equity loans can literally be funded in a matter of days. As a foreclosure auction approaches, the equity loan possibility should always be considered if you have equity in your property.
Loss Mitigation Options
Since this recent wave of foreclosures began, lenders have become more open to using “loss mitigation” tools at every opportunity. The word “mitigation” means to “reduce or lessen.” Thus, when lenders engage in loss mitigation with borrowers, they are trying to reduce the losses to their bottom line and return a non-performing loan back to performing status.
Loss mitigation options that allow you to retain your home, at least temporarily, are as follows:
1. Forbearance Agreement – When a lender agrees to this option, they are agreeing to temporarily “forebear” (postpone) from taking further foreclosure action on a defaulted loan. In essence, the lender places the foreclosure on hold. This is usually done when you can demonstrate that the reason causing the default was temporary and you will be able to cure the default within reasonable time. Typically forbearance agreements last 3-6 months or less.
2. Repayment Plan – With this option, a lender agrees to allow you to catch up on the delinquent payments over time. This is usually accomplished by making you pay an extra amount in addition to your regular payment over a specified time period. In the past, this was usually not more than one year, but with increasing numbers of defaulted loans, some lenders are now extending the length of repayment plans to 18 months to two years.
3. Loan Modification – If you can demonstrate that the hardship leading to your default was temporary, but you cannot afford to pay an extra amount each month or you are struggling to pay the current payment, the lender may agree to modify the terms of your loan. For example, the lender may add the missed payments to the back of the loan or add the total delinquent amount to the principal and re-amortize the loan. Sometimes lenders even extend the term of the loan or reduce the interest rate to reduce your monthly payment to an amount you can afford to pay. However, the loan modification option may not be able to be utilized if there is a 2nd mortgage on the property. This is because a modification of a 1st mortgage would impair the rights of the 2nd mortgage by increasing the total amount of debt that is senior to the junior lien holder on the property.
NMLS No. 847754