The three most frequently used methods to resolve foreclosure are loan
reinstatement, forbearance agreement, or loan modification. While there
are numerous other specific ways to stop foreclosures, these three are
used most frequently.
1.) Loan reinstatement is where a lender has started the
foreclosure process and the homeowner finds a way to pay back or
"reinstate" the entire deficiency owed. The deficiency amount includes
back loan principal and interest payments, accelerated interest costs,
attorney's fees, assorted processing and collection expenses, and late
penalty charges. This technique requires the maximum amount of money
all at once. Ironically, lenders recently indicated that pre-payment
penalties may be included into final judgments in the near future.
When the homeowner's reason for the delinquency is resolved, he usually
asks the lender to take partial payments because he can't get the
entire deficiency amount together. However, the lender will not accept
partial payments and the foreclosure will proceed if the full
reinstatement amount isn't paid. The reason for this is simple, the
lender knows that the homeowner's chance of getting out of, and staying
out of foreclosure is less than 1 in 8. So the lender does not want to
drag out the inevitable, the loss of the home to foreclosure.
2.) A forbearance agreement between the lender and the homeowner
stipulates that the homeowner must make additional monthly payments for
a specific period to make up the reinstatement amount that he couldn't
pay in full. As simple as it sounds, it may be unaffordable for the
homeowner who could barely afford the original loan payment. The lender
will usually ask that the homeowner pay the reinstatement amount over a
three or six month period. If the monthly loan payment was $2,000 per
month and he was 3 months in arrears, the new monthly payment for a
three month period would be at least $2,000 + $6,000/3 = $4,000 per
month. For a six month repayment schedule the new monthly payment would
be $2,000 + $6,000/6 = $3,000 per month. In some instances the lender
may ask for an additional cash payment before they will start the
increased monthly payments. After the 3 or 6 months, the loan payments
revert to the original amount or $2,000 in the above example. The
foreclosure does not stop with the signing of the forbearance agreement
but simply is put on hold until the homeowner completes making all the
increased payments.
When you speak to your lender try for 12 months and don't accept
less than 9 months unless you can truly afford it! Ask them to review
your financial statement, which they should readily send you and
remember that the lender has already pulled your credit report and
knows where you work, possibly how much you make, how many other
monthly payments you have, and other information in the public records.
They have also done a price analysis on your home and probably had a
Broker's Price Opinion (BPO) completed. Essentially they know what
answers you should be giving them, so be forewarned. This method of
reinstatement takes as much money as the loan reinstatement except it
is spread over 3 - 6 months or, hopefully, more.
3.) A loan modification program was the most common method of
foreclosure resolution for decades. It involved the lender issuing a
new loan agreement where the deficiency amount was added to the loan
balance and paid in identical monthly payments but for many more
months, at the end of the loan. The monthly payments remained the same
and if the home was sold, the balance of the reinstatement amount was
paid from the proceeds of the sale. This method of resolution requires
no up-front cash and the same monthly payment as before the
foreclosure.
Another type of loan modification was to very slightly increase the
monthly payments over the remaining term of the loan. So the homeowner
has a choice of either extended but identical payments (as above), or
slightly higher payments for the original term of the loan. Either
option repaid the lender his money back plus interest. It was an
affordable win-win for the lender and the homeowner, but is seldom
offered anymore unless the lender knows the property is not worth
taking back by foreclosure and he hasn't sold the loan into a mortgage
pool.
Loan modification programs are usually not available unless there is a
hardship involved such as a job loss, death or illness. But it is worth
asking your lender about it if you are in foreclosure because the
market conditions and massive loan defaults puts pressure on the
lenders to be more cooperative with homeowners. Your best option is to
talk to your lender and as early as possible so you have time to
resolve your problem.
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