Helping Your Lender to Help You (Avoid Foreclosure) Part 2

One can hardly listen to a news report today without hearing about a national epidemic of declining property values and adjustable rate mortgages (ARMs) re-setting at alarmingly higher rates. Over 1.26 million Americans went into foreclosure last year, and the number has risen sharply. In the present housing climate, home owners need to be vigilant in protecting themselves against foreclosure on existing mortgages.

Following is the second in a two-part series exploring are ways that consumers can work with lenders to avoid foreclosures that are devastating for the consumer and costly for the lender.

What Options Will the Lender Offer?

If you are behind on your mortgage payments, you might be able to prevent foreclosure by agreeing to one of the following:

Repayment plan. The lender will allow you a set amount of time to catch up on the delinquent amount. You will do this by adding a portion of the past due balance to the regular payment every month. If you have only missed a few payments, this may be the best way to catch up.

Reinstatement. This option may be the best one to choose if the problem with mortgage payment is temporary, like you were out of work for a few months. You agree to pay the entire past due amount, late fees, and penalties by a given date.

Forbearance. Occasionally a lender will offer this option, especially if you are on disability leave from work and you can show the lender that you will be able to return to work soon. The lender either reduces your mortgage payments or suspends them altogether. At the end of the agreed-upon time period, you resume the regular payments. In addition, you will either make a lump sum payment or add on partial payments for a period of time in order to bring the loan up to date.

Loan modification. This is an overhaul of the terms of your mortgage loan; it may include changes to the interest rate, the loan term, or adding your missed payments back t o the loan balance.

Other Options to Consider

Sometimes life circumstances change, due to divorce, death, or other family issues. Sometimes people experience the loss of employment or temporary layoffs. Often they simply find that they bought more house than they could afford to pay for. If you find that you cannot afford your mortgage payments, there are a couple of other ways to avoid the foreclosure.

Sell Your Home

A home sale may give you the funds to pay off the mortgage loan. However, how quickly you can sell the home depends on many factors. Be sure to check with your real estate agent to see how quickly it might sell before you agree to put the home on the market.

File Bankruptcy

Personal bankruptcy is not the best option under any circumstance. The bankruptcy will remain on your credit report for ten years. It will make it hard to buy a home, get credit, and it might even affect your ability to get a job. But a Chapter 13 bankruptcy does allow you to keep your home under certain circumstances. 

Whatever you do, take action quickly. Be forthright and honest about your situation. Your lender can offer many more options when you are only one or two payments behind. Lenders don't make money through foreclosures; they make money from your principal and interest payments--so they are motivated to help you through the rough patches.

Further Reading

Read the first part of this series.

For a listing of HUD counselors by state: HUD Counselors

Learn about US Bankruptcy

HUD Hotline: 1-888-995 HOPE

Tanya Davis is a writer specializing in real estate and mortgage topics. She is the author of The Real Estate Developer's Handbook.