Avoiding Foreclosure

Avoiding foreclosure can be as important to mortgage companies as it is to the individual homeowner. Mortgage companies can foreclose if a homeowner does not pay his or her monthly payments over a period time. Foreclosure means that the homeowner will lose the title to his or her property and may even be evicted. A foreclosure will likely have a major negative effect on a person’s credit.

The most straight-forward way of avoiding foreclosure is to save enough money to cover several months of housing expenses in case of an unexpected emergency, such as illness, death of a loved one, or loss of employment.

However, if someone is already in the position of not being able to pay his or her mortgage, there are still ways of avoiding foreclosure. Call the mortgage company as soon as the inability to make payments is realized. Options for the retention of property are most successful when an individual is only one or two payments behind. Depending on the situation, a mortgage company may be able to provide the individual with provisional economic reprieve. Some options that mortgage companies and homeowners can consider include:

Forbearance – A forbearance period is a period time that the mortgage company allows the homeowner to default on his or her payments, or pay less than the complete amount. This is normally only permitted if the homeowner can prove that he or she will be able to pay the mortgage in the future from a bonus, tax refund, or other source.

Reinstatement – A reinstatement normally occurs in combination with forbearance. It is when the homeowner and mortgage company agree on a future date on which the homeowner pays the total amount he or she is behind in a lump sum.

Repayment plan – A repayment plan accomplishes the same thing as a reinstatement, but instead of the past due portion being paid in a lump sum, it is combined with the regularly monthly payment. These combined payments are given over a fixed amount of time.

Loan modification – With loan modification, the homeowner and mortgage company enter a written agreement which permanently changes the terms on the mortgage, usually to make payments more affordable.

The next step should be to contact a non-profit housing or credit counseling agency. These organizations help examine and sort out these types of economic situations and do not require a mortgage company’s immediate involvement. For more information please visit the US Department of Housing and Urban Development and the Federal Housing Administration.

If an individual is still unable to pay for his or her home, there are still steps that can be taken to avoid foreclosure. It is important to avoid foreclosure as it can have devastating effects on one’s credit. Some options for avoiding foreclosure if you are unable to make monthly payments are:

Assumption – This allows a buyer to take on the mortgage, including the debt. In the end, the homeowner sells his or her property and avoids foreclosure.

Short Payoff – In this instance, the homeowner sells his or her house but does not make enough off the sale to cover the whole amount he or she owes on the mortgage. The mortgage may then consent to a short payoff in which they write off the part of the mortgage that surpasses the net proceeds from the sale.

Deed-in-lieu – With a deed-in-lieu, a homeowner may willingly sign over his or her deed to the mortgage company in exchange for cessation of debt. However, this cannot be done if there are other liens on the home. Also, usually the homeowner has to have tried to sell the house for at least 90 days for its fair market value before the mortgage company will do this.

Lastly, in attempting to avoid foreclosure it is important to beware of scams. Here are some things to be wary of:

  • High interest rates
  • Broker fees
  • Unnecessary costs like pre-paid life insurance
  • Unaffordable repayment terms
  • Be suspicious of anyone who offers "bargain loans."
  • Beware of promises of "No Credit? Bad Credit? No Problem!" and offers that are only "good for a very short time".
  • Avoid lenders who encourage borrow in more than one needs or more than the value of the home.
  • Beware of terms that change at the last minute or offer next-day approval based on prepayments or up-front fees.
  • Beware of phony credit counseling agencies charging high fees for financial counseling services which can be gotten for little or no charge through non-profit agencies.