Ways to Keep Your Home Out of Foreclosure and Start Over Again

Here are some of the options available to delinquent borrowers. To determine which alternative is the most appropriate, not only for the borrower but also the investor, lenders determine the true reason for the default and whether it is temporary or permanent:

* Forbearance.

Under this procedure, the lender will enter into a formal repayment plan with the borrower to reinstate the loan, either by suspending or reducing the payments for up to 24 months until the borrower can recover from the setback.

In most cases, the borrower will be asked to begin making regular monthly payments plus an additional amount each month until the amount owed is made up. But in some cases, borrowers are permitted to make reduced monthly payments until they can get back on their feet, make full monthly payments but delay repaying the arrearage or make gradually increasing payments.

* Modification.

This is a permanent change in one or more of the borrower’s loan terms to get the payment down to an affordable amount. It is intended to help people who have suffered a financial hardship and no longer have sufficient income to sustain the original loan and make up what they owe.

The lender can lower the interest rate to make the payments more affordable, extend the time available to repay or re-amortize the balance. To make it easier to make up the missing payments, the delinquent principal, interest and escrow amount can be recapitalized into the loan amount.

* Advances.

If a borrower is less than 12 months behind on a government-insured loan, the lender can reinstate the loan by advancing funds to the investor on the borrower’s behalf. In return, the borrower must sign a note promising to pay back the allowance--but without interest.

Normally, this tool is not available if the lender has already started the foreclosure process. But the lender can cancel foreclosure if the borrower’s financial situation has improved enough to restart the loan. It also can be used in conjunction with a special forbearance plan.

* Deed in lieu of foreclosure.

If it is evident the borrower is unable to dig out from under the weight of financial woes, the lender can allow the borrower to voluntarily deed the property back to the investor (or government) in exchange for a release from all obligations under the mortgage.

Though this disposition option results in losing the house, it is usually preferable to foreclosure because it mitigates the cost, stigma and emotional trauma that goes along with foreclosure. And it is less damaging to the borrower’s ability to obtain credit in the future.

In some cases, the FHA will even pay the borrower a $500 to $1,000 stipend to execute a deed in lieu of foreclosure.

* Short sale.

Also known as a short payoff, this workout option is sometimes available when property values have declined since the borrower took out the mortgage. It allows a sale for less than the full amount owed.

* VA refunding.

The Department of Veterans Affairs has the authority to buy loans in default from investors and take over the servicing. But it is an option on the government’s part and not every borrower qualifies. However, the VA’s rules are said to be more lenient than the FHA’s or those of private investors.