Ways to Stop Foreclosure

Ways to Stop Foreclosure


Foreclosure is the process by which a creditor regains possession of a property when the borrower has stopped making payments on the loan. This situation can arise for many legitimate reasons, including loss of job or income, medical situations or a death in the family. Foreclosure should be considered a last resort by both parties, as it involves time and money for legal proceedings, hurts the borrower's credit, and often results in loss of money by the lender. There are several options available to stop foreclosure. They should all be seriously evaluated as a possible way out of a bad situation.

The first thing to consider is a Loan Modification plan. This is very popular and is suited for people who can make current mortgage payments, but cannot pay for past-due payments. For instance, if a medical emergency resulted in a homeowner being out of work for several months and unable to make mortgage payments, a Loan Modification plan will stop foreclosure by folding past-due payments into the principal owed. Payments are continued normally from that point forward. The new principal balance is reamortized over a new term, but this is usually well worth it for the homeowner to stop foreclosure.

Forbearance is another good option and it buys the mortgagor time by slowing down the process of the foreclosure. Essentially, the homeowner promises to take certain steps in exchange for the creditor temporarily ceasing legal action. This step may include making home repairs or improvements, or listing the property for sale with an accredited Realtor.

Often the option to refinance the home is one to consider in an effort to stop foreclosure. There are many different types of loans available to consumers today and the field is very competitive. For example, an interest-only loan could make sense depending on market conditions. The advantage of an interest-only loan is that monthly payments are significantly lower than with more traditional loans. The disadvantage is that nothing is being paid toward principal, so in a soft or downward-trending market where home values are decreasing, there is considerable risk of losing money in the long run. Any serious effort at attempting to stop foreclosure should include thoroughly evaluating refinance options with a loan specialist.

Sometimes it is possible to stop foreclosure with a short sale. This involves selling the home on the market for less than what is owed to the lender. The mortgagor or representing lawyer then negotiates with the lender to settle for less than they are owed instead of proceeding with foreclosure. Sometimes this makes sense to the lender if the loss from the short sale is less than what they stand to lose from legal proceedings and fees associated with foreclosure. If possible, work directly with the lender's supervisor who is responsible for handling short sales.

Ample documentation will be required for a short sale. Exactly what will need to be provided will vary from lender to lender. In general, one can expect to prove loss of job or income in writing as well as a hardship letter describing the homeowner's current financial or medical situation. Other common forms of documentation include an estimated net sheet showing the expected sales price of the home, copies of bank statements and market comparisons of other homes sold in the area.

Finally, it may be possible to arrange a Deed in Lieu transaction. This is where the borrower hands over the property to the lender instead of paying off the debt. This of course results in the homeowner being out of a home, but if this is an option, it is often far more desirable than foreclosure. This is particularly true if there is not much equity built up in the home. One advantage for the mortgagor is that his credit history will not blemished with a foreclosure mark, which will certainly make future borrowing more difficult. Another advantage is that the homeowner gets to merely walk away from the debt situation and avoid the hassles and stigma of foreclosure.

Deed in Lieu is only possible if both parties, in good faith, agree to the arrangement. A lender may opt for this if the value of the property is close to, or exceeds the amount of the debt owed. Once the deed in lieu is accomplished, the home can be sold on the market by the lender, who then keeps all the money resulting from the sale in order to recover the debt. Even if the lender only breaks even, or comes out slightly behind, this is often a big savings over the cost of the legal proceedings of foreclosure.

Foreclosure can be a complicated and costly process for both the borrower and the lender, and can have some very negative consequences. It is often in the best interest of both parties to stop foreclosure by proceeding with one of several better options. Whether this action involves loan modification, forbearance, refinancing, a short sale, or a deed in lieu, totally depends on the circumstances of the situation. The value of the home, amount of equity, amount of the loan and living situation of the homeowner all play a role in evaluating which option is best.