Some of the most common questions homeowners want answers to when behind on mortgage payments are: how much longer can I remain in the house, can I modify the loan, is a short sale available to me, and which option is better for my credit rating.
The following are good options to consider if you have received formal notice of foreclosure from your lender:
- Refinance: If a homeowner has equity in the house and good credit, refinance is the best option.
- Reinstatement: If a homeowner has the ability to borrow or redeem funds from a retirement account, the entire default amount, which includes interest, late fees and attorney’s fees, is paid and the mortgage reinstated. A homeowner may reinstate the mortgage up to the day before a sheriff sale.
- Forbearance: The lender may arrange a repayment plan based upon the homeowner’s financial hardship. The homeowner makes the regular payment in addition to a portion of the back payment owed over a specific period of time; e.g. six months.
- Bankruptcy: This option can discharge personal debt, postpone a sheriff sale and allow you time to review other options. If eligible, a Chapter 13 allows a homeowner to keep their property and provides a three to five year time frame to make payments on the mortgage arrears. This plan is available to individuals with regular income to support the payments. Payments are made to a trustee and the trustee is responsible for distribution to the lender and other secured creditors. Both types of bankruptcy generally result in a “stay” meaning the foreclosure process temporarily stops. Bankruptcy will affect your credit and will be reflected on your credit report for seven to ten years.
- Loan Modification: The lender may lower the interest rate which will reduce the monthly payment and extend the term of the mortgage. To qualify for a modification, the homeowner must show regular income to support the payments. This process is also known as Loss Mitigation. As part of the loss mitigation process, a homeowner is required to provide financial documentation in support of the application.
- Defend the foreclosure: By entering a defense to the foreclosure based upon failure to comply with procedural rules or requesting production of certain documents in support of the default, the homeowner may remain in the home for up to 2 years after service of the complaint. This option is necessary if the homeowner will be considering other options, such as modification, bankruptcy or short sale.
- Sale: If a homeowner has equity in the house to cover the costs of settlement, the house can be sold through a conventional house sale and the homeowner retains the proceeds.
- Deed in lieu of foreclosure: The homeowner proposes to sign a Deed transferring title of the property to the lender, and the lender may agree to release you from further obligation on the mortgage. The conveyance of the property to the lender avoids the foreclosure process. This option is better for your credit rating than a foreclosure.
- Short Sale: When a mortgage is “upside down” or “underwater”, it means that the homeowner owes more on the property than it is currently worth. In the short sale process, the homeowner, assisted by an experienced realtor, lists the property on the market to find a buyer. The Agreement of Sale is forwarded to the lender and negotiations begin to sell the property for less than what is owed on the mortgage. Approval from the lender is required before going to settlement. A short sale may be done while a homeowner is in the foreclosure process. It may result in Form 1099 income for the homeowner unless a release is signed by the lender.
- Do nothing: If a homeowner does not enter a defense to the complaint in foreclosure, a sheriff sale is scheduled as a matter of course within 12 months from date of service, and the Deed becomes final 30 days after sale. If the property is not vacant after sale, the new property owner is required to file a complaint in ejectment against all individuals residing in the property. If no defense is entered to the ejectment process, the judge will sign an order permitting the sheriff to break and enter the property approximately 90 days after service of the complaint. A foreclosure remains on a homeowner’s credit report for up to 10 years.