Guidance for Homeowners Facing Foreclosure
The following post draws heavily on points from a recent article written by Michelle Lind, General Counsel for the Arizona Association of Realtors, and merits the attention, in light of its relevance in today’s mortgage market:
Here are some options and resources for a homeowner in default.
Contact the Lender or a HUD-Approved Housing Counseling Agency
The natural reaction by many homeowners is to hide their heads in the sand in denial, until it’s too late. To the contrary, the sooner you approach your lender about your situation, the more likely you are to work out a favorable resolution to your difficult situation.
When you call your lender, ask for the “Loss Mitigation Department” or the “Department responsible for negotiating loans in default.” Explain the situation to them and find out if there are any loan workout options.
If you don’t want to talk to the lender directly, contact a HUD-approved housing counseling agency, who can contact the lender on the homeowner’s behalf.
When you call your lender or counselor to discuss your options, have the following information on hand: loan information, monthly income documentation (pay stubs, tax returns), monthly expense documentation (utilities, child care, car payments, etc.). The lender may also require the homeowner to complete and return a loan workout package.
Possible Loan Workout Options
Possible workout options include:
- Reinstatement: Paying the total amount owed in a lump sum by a specific date in exchange for forbearance.
- Forbearance: An agreement to reduce or suspend payments for a short period of time.
- Repayment Plan: An agreement to resume making monthly payments with a portion of the past due payments each month until they are caught up.
- Loan Modification: An agreement to change the terms of the original loan to make the payments more affordable. For example, missed payments can be added to the existing loan balance, the interest rate may be modified, or the loan term extended.
- Claim Advance/Partial Claim: If the loan is insured, the homeowner may qualify for an interest-free loan from the mortgage guarantor to bring the account current. If so, the homeowner will be required to sign a promissory note and a lien will be recorded against the home until the loan is paid in full.
The Option to Refinance with Another Lender
If the lender will not agree to a workout, you can look into refinancing the loan with another lender. Resources include:
Sale Options to Avoid Foreclosure
If neither loan workout nor refinance is an option, you may consider selling the property. The lender may elect to work with the homeowner to sell the home and avoid foreclosure. The options include:
- Work Out Sale: An agreement not to foreclose for a specific amount of time to allow the home to be sold and the loan to be paid off.
- Short Sale: In a situation where there is more debt owing against a property than the property’s value, the lender may agree to allow the property to be sold for less than the loan amount and/or accept less than the amount owed as payment in full.
- Assumption: The lender may allow a buyer to assume the loan and purchase the property even if the loan is non-assumable.
Deed in Lieu of Foreclosure
The lender may allow a homeowner to give back the property, an option that may not be possible if there are other liens against the property. Other resources include:
Be Aware of Predatory “Rescue” Scams
While there are many reputable and ethical groups that can help homeowners out of their desperate situation, there are also many predatory scam artists who troll the foreclosure lists for susceptible homeowners. Common scams include:
- Loans with high interest rates and unaffordable repayment terms
- Loan assumptions where the homeowner is not released from liability on the loan
- Offers to repay the loan or sell the property if the homeowner signs over the deed
- Counseling agencies that offer counseling for a fee when it is available at no cost
Remember, if it sounds too good to be true, it probably is. Be sure to report suspected scams to the Department of Financial Institutions.
Naturally, one of your best allies and advocates is an experienced and reputable Realtor.