With the recent government involvement, fewer home loans are now being foreclosed. FHA, VA, FNMA and FHLMC require that all options to avoid foreclosure must be explored. Investors / Mortgage Insurers / Mortgage Guarantors (the "lenders" or the "banks" in common vernacular) have a cost of about 1.5% per month when a home goes into foreclosure... and that does not include the depreciating value of the home.
| Option | Characteristics | Who it is good for |
|---|---|---|
| Reinstatement Plan (Become current) |
Acknowledging the delinquency and working together to bring the loan current. All past due amounts, late fees, and attorney's fees are paid, in a lump sum, by a specific date, to bring your loan current. This is often combined with forbearance | When you are capable of paying your mortgage obligation and have a sufficient liquidity to repay all delinquency, but for some reason, had a temporary inability to pay. For example, a commissioned sales person who missed a month or two of work, but is now back up to speed and has already generated cash reserves. |
| Repayment Plan (Catch-up over time) |
Agreement to repay part of past due amounts each month, along with the regular monthly payments. | When after once having fallen behind on payments, you are now again capable of paying your mortgage obligation but cannot immediately repay all delinquency. For example, a salaried employee who missed a month or two of work, is now back on the job, but only makes "a little extra" each month with which to play catch-up. |
| Loan Modification (Permanant change to loan) |
Agreement to change one or more of the terms of your loan in order to make your payments affordable. Anything in writing can be modified. All changes must be in writing.
|
When your adjustable rate has reset and your monthly payment has jumped outside your capacity. For example, if you got an unnaturally low teaser interest rate and it reset (or will reset) to a higher rate adding from several hundred to as much as doubling your monthly payment. Capitalization may be used when other modifications would not be appropriate, such as, if the interest rate is already at or below the market rate, or if the delinquent amount due is just too much for the Homeowner to pay back within the specified period of time |
| Pre-approved Loan Modification |
Lender determines acceptable loan modification (without prompting) and sends contract to homeowner. | Lender's decision. |
| Refinance (traditional) | Get a new loan at todays rate to replace existing loan. The highest loan to value (LTV) possible currently is 105%, for conforming loans. This option is available to only a few people in Southern California because most have home prices above the conforming loan limits or else we are so upside-down that 105% is not enough to get the job done. | When you are current on your mortgage, have income you can document, and have sufficient equity and income to qualify. |
| Short-Refinance | Agreement with lender(s) to take less than the full amount owed while you refinance at today's interest rates and most likely with a 30 year fixed rate loan. Effectively this is a loan modification with a principal reduction, but it might be with a different lender. | Everyone! Woot! But, well, the banks aren't very keen on this. It may occur in the off chance that you have first tried a loan modification and been unable to get sufficient cooperation, and you are ready and willing to do sale. In rare occasions, we can turn the bank's willingness to accept a short sale as evidence that they ought to be able to perform a similar loan modification - hence we get a short-refi |
| Short Sale | Agreement with lender(s) that the sales proceeds from the sale of the home will satisfy the debt, even if that amount is less than what is owed. The
"forgiven debt" is considered as income for IRS purposes and a 1099 will be issued. Current laws may forgive taxes on forgiven debt, but check with your CPA. State and Federal tax laws may vary. |
Anyone who needs to move and get out from under the home mortgage. |
| Pre-approved Short Sale |
Lender determines delinquent homeowner has no chance to succeed at a loan modification and the only clean way out for the homeowner is a short sale. | Lender's decision. |
| Short Sale Lease-Back Purchase Option |
Agreement with lender to take less than the full amount owed when the home is sold to an investor who agrees to lease the home back to you at a fixed rental rate, based on the current value of the property, with the option for you to buy-back the home in three to five years. | Anyone who needs to move and get out from under the home mortgage but really wants to be able to stay in the home and hopes to be able to restore their credit and re-purchase their home in 3-5 years. |
| One-time-Assumption | Agreement with lender to allow another person to assume the loan. The lender would have to approve the new mortgagor. | Anyone. However, this only makes sense if there is equity in the property. |
| Deed-in-Lieu (of foreclosure) |
Agreement with lender to take back the property in exchange for forgiveness of the debt. Because this is voluntary, the Homeowner does not have a foreclosure or deficiency judgment on his or her credit report. It is very important to be sure that this condition is "negotiated in" and verified in the final documentation. | Anyone. As with most situations, it requires agreement from the bank. Because the bank now becomes responsible for the property, including any additional liens (e.g., loans), this is usually not an option. |
HUD Brochure: How To Avoid Foreclosure from the U.S. Department of Housing & Urban Development