If you’re a homeowner struggling with or behind on your mortgage payments – first you’re not alone – second the best thing you can do is to be aware of and understand your options. No matter what your financial situation, the WORST thing you can do is NOTHING. There are options and your financial situation will likely determine which is the best path for you to take. If you absolutely can not make the mortgage payment, now or in the near future, at this point you should be looking at how to minimize your loss and the impact to your financial and credit situation.
Reinstatement
Acknowledging the delinquency and working with your lender to bring the loan current.
Reinstatement is the acknowledgment by a loan Servicer that a loan in default has been brought current by the homeowner. There are several different workout options that would generate a reinstatement. The most common options are defined below.
Loan Modification: A written agreement between the Homeowner and the loan Servicer to temporarily, or permanently, alter one or more of the terms of the original agreements. There are several types of loan modifications, including (1) rate reduction; (2) capitalization; (3) term extension; and (4) one-time assumption.
NOTE: Anything in writing can be modified, i.e. interest rates, term of loan, due date, etc. All changes must be in writing.
Option 1: Rate Reduction Modification
This type of loan modification may permanently reduce the interest rate associated with the loan, thus lowering the monthly payment for the Homeowner.
Option 2: Capitalization/Forbearance
Capitalization/Forbearance means adding the delinquent payments into the remaining balance and updating the payment due date and perhaps “recasting” the payment amount. Capitalization may be used when other modifications would not be appropriate, such as, if the interest rate is already at or below the market rate, or if the delinquent amount due is just too much for the Homeowner to pay back within the specified period of time.
Option 3: Term Extension
Term extension is extending the amount of time the Homeowner has to repay their loan to achieve a reduced monthly payment (i.e. 15 year mortgage extended to 30 years). Term extensions are often used together with an interest rate reduction or a capitalization modification.
Option 4: One-Time Assumption
Most mortgages are non-assumable, which means the loan cannot be transferred from one owner to another. However, as a form of loss mitigation/Home Retention,the loan Servicer may opt for a one-time assumption, in order to facilitate the sale of the property. Generally if the Homeowner can demonstrate hardship, Fannie Mae and Freddie Mac will allow a one-time assumption. HOWEVER, the transaction must be an “arm’s length” transaction. In other words, there cannot be any pre-existing relationship between the Homeowner and the individual assuming the mortgage.
Option 5: Loan Type Conversion
Some Homeowners with an adjustable rate mortgage (ARM) may not be able to keep up with increased payments during times of increasing interest rates. In this case, the loan Servicer may opt to modify the loan type to avoid increasing the interest rate. The loan could be converted to a fixed rate mortgage.
If you’re unable to pay your mortgage and don’t think you will be able to soon, the follow are some options you may want to consider:
Pre-Foreclosure Sale
In a pre-foreclosure sale, the lender/servicer allows the Homeowner to sell the house within a 2 to 4 month time frame. During this time, the house must be actively marketed.
Short-Sale
A short-sale requires that prior to the sale, the Servicer agrees that the sales proceeds from the sale of the Homeowner’s home will satisfy the debt, even if that amount is less than what the Homeowner owes on the loan. The Homeowner may be responsible for taxes on the forgiven debt. This may be an option if you need to sell for other reasons, such as job relocation or divorce. The Homeowner should refer to a Tax Attorney or their Tax Accountant.
Deed-in-Lieu
A deed-in-lieu of foreclosure is when the Homeowner voluntarily gives the property deed to the loan Servicer in exchange for forgiveness of the debt. In this situation, the Homeowner does not have a foreclosure or deficiency judgment on his or her credit report. The Servicer will report a derogatory report on the Homeowner’s credit report.
