Blogging for Change

Alternatives to Foreclosure

by Jesse Campbell on
1/29/2024
in Housing and Homeownership
Concerned couple talking with real estate agent.

The following is provided for informational purposes only and is not intended as legal advice.

If you're a homeowner, the threat of losing your home can keep you up at night. If you're struggling to make your mortgage payments and start falling behind, there's a good chance that your lender may attempt to foreclose on your property.

A foreclosure will cost you your home, so it's something to be avoided at all costs. If you're concerned about a potential foreclosure consider these potential alternatives.

Options to prevent a foreclosure

Work with your lender to rehabilitate your loan

If you can afford it, the best path is to collaborate with your lender on a plan to bring your loan current. Contact your lender as soon as you begin to struggle with your payments and ask about your options. 

Missed payments may be added to the end of your loan term (creating additional interest charges) or incorporated into upcoming payments.

Loan modification

A loan modification is an agreement that actually changes the term of your loan. The modification could potentially lower the interest rate and payments to an amount you can afford. Just like when you first took out the loan, you'll need to provide information about your current financial situation. 

Forbearance

Forbearance is a temporary reduction or total pause in your monthly mortgage payments. During a forbearance you won't fall behind or be reported late on your credit report as long as you follow your agreement. Interest, however, will continue to accrue, making your mortgage more expensive in the long run.

Partial claim

A partial claim is when the mortgage insurance company on your loan lends you the money to bring your loan current. If your loan has mortgage insurance, the insurance company stands to lose if you default. To help keep you in the house, the mortgage insurance company may help you get current on the loan.

Many mortgage insurance companies have trained personnel available to help people who are having trouble with their mortgage payments. 

Permanent hardship

A permanent hardship occurs when you can no longer afford to make the mortgage payments. Your mortgage company may agree to delay the foreclosure on your house for up to 120 days and give you time to sell the house. If, when you sell the house, you get less than what you owe on the house, the lender may forgive the difference.

Deed in lieu of foreclosure

A deed in lieu of foreclosure is when you voluntarily deed the property back to the investor (or government) in exchange for a release from all your obligations under the mortgage. Although you lose your house, it is usually preferable to foreclosure because of the cost and emotional trauma of a foreclosure. And it is less damaging to your credit rating.

In some cases, the Federal Housing Administration (FHA) will even pay the borrower a stipend to execute a deed in lieu of foreclosure.

Short sale

A short sale, also known as a short payoff, works when property values have declined since the borrower took out the mortgage. It allows you to sell for less than the full amount you owe.

On VA loans, the Department of Veterans Affairs has the authority to buy loans in default from investors and take over the servicing of the mortgage loan. Executing a short sale is an option on the government’s part and not every borrower qualifies.

Quitclaim deed

A quitclaim deed transfers whatever interest you have in a particular piece of property. By accepting such a deed, the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has.

Bankruptcy

Depending on your situation and the exemptions available in your state, you may be able to file for bankruptcy to alleviate your other debts without losing your home. Chapter 7 bankruptcy involves the sale of all of your non-exempt property, which could include your house. Chapter 13 creates a repayment plan and is much less likely to put your house at risk.

Sell the house

If you ultimately can't keep the house, the best outcome may be to sell the house at market value (and avoid more complicated options, like a short sale). Downsizing to a more affordable house may alleviate some of the budgeting stress that made it hard to handle your original mortgage payments.

If you're having trouble making your home loan payments, work with a HUD-certified housing counselor ASAP to walk through your options and get help connecting with your lender.

Tagged in Mortgages and foreclosure

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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