• What are Alternatives to Foreclosure?

    The key way to avoid foreclosure is to know one’s rights and work with the lender. More often than not, lenders want to assist homeowners and prevent foreclosure. If there are financial difficulties, it is recommended to contact a counselor at a housing counseling agency.

    In the event of imminent foreclosure, alternatives are available to avoid foreclosure altogether. These alternatives include special forbearance, mortgage modification, partial claim, pre-foreclosure sale, and deed-in-lieu of foreclosure. Both a lender and a housing counseling agency can educate the homeowner on the alternatives. A housing counseling agency is provided by the United States Department of Housing and Urban Development. A housing counseling agency may also provide credit counseling at no cost to the homeowner.

    The first alternative is special forbearance, which provides a repayment plan with the lender based on the homeowner’s financial circumstances. This repayment plan may temporarily reduce or suspend payments in the event that the homeowner has an income reduction or an increase in living costs. This information must be given to the lender as proof that the new payment plan will be feasible. The second alternative is mortgage modification, which allows the homeowner to refinance the remaining balance on the mortgage or extend the term of the mortgage loan. This alternative may reduce monthly payment costs and is available if the homeowner can afford the payments under the new plan. The third alternative is partial claim, which provides that the lender work with the homeowner and obtain a one-time payment to make the mortgage payments current. To be eligible, the homeowner must be capable of making the mortgage payments in full. The fourth alternative is pre-foreclosure sale, which forces the sale of the property for a lesser amount in order to pay off the loan. This is also known as a short sale, where the property is bought from a lender for a discounted cost. The final alternative is deed-in-lieu of foreclosure, which provides that the homeowner returns the property to the lender and relinquish all rights to the property. This alternative will not negatively impact the homeowner’s credit as much as foreclosure would. To be eligible, the homeowner must be in default, does not qualify for other alternatives, and has unsuccessfully attempted to sell the property prior to foreclosure.

    Usually, banks prefer short sales while the property is in pre-foreclosure, which has two stages. The first stage has the homeowner behind on payments and the second stage is the notice of default to the homeowner. The short sale must occur in the second stage, after the notice of the default has been recorded.
  • Ask a Legal Question