Foreclosure refers to a legal procedure wherein a lender sells a borrower’s home in order to recover missed mortgage payments. There are certain circumstances, however, in which a borrower may be permitted to choose a different alternative to foreclosure in order to pay off their mortgage debt.
Whether a borrower will be allowed to pursue one of these alternatives to foreclosure or not, will primarily depend on the arrangement that a borrower has with their lender. In most cases, a lender will usually be willing to work with a borrower to either renegotiate the terms of their mortgage loan agreement. They may also attempt to figure out another solution in which the buyer will be allowed to keep their home and the lender will still get paid.
This is especially true given the impact that COVID-19 has had on the foreclosure process. Thus, if you are experiencing issues with your mortgage payments or are in danger of having your house foreclosed on by a lender, then you may want to contact a local foreclosure attorney as soon as possible. An attorney will be able to provide legal advice on various alternatives to foreclosure that may be available to you and tailored to your specific needs.
Are there Alternatives to Foreclosure?
There are a number of alternatives that borrowers can pursue to prevent foreclosure. Some of these alternatives permit the borrower to stay on the property, while others require the borrower to either sell the property or give title to the lender. Whether a borrower can use a particular foreclosure alternative will depend on their financial situation.
In some cases, a lender may even offer their own alternatives to foreclosure. However, these will often vary in accordance with the circumstances, the lender’s policies, state laws, and on the terms of the contract agreed to by the borrower and the lender. Additionally, COVID-19 has led to some new foreclosure measures as well.
What Are Alternatives That Allow the Mortgagor to Keep the House?
The following is a list of the most common examples of foreclosure alternatives that allow a borrower to keep their house, such as:
- Temporary forbearance: In some situations, a borrower may be able to qualify for a temporary forbearance. A temporary forbearance is a foreclosure alternative that may be used to suspend or delay a borrower’s mortgage payments. This gives the borrower more time to catch up with their mortgage payments. For instance, a lender may agree to a temporary forbearance if the borrower is experiencing an unforeseen financial hardship like being laid off from a job due to COVID-19.
- It should be noted, however, that a lender may continue to charge interest on the mortgage despite the temporary forbearance. Additionally, once the temporary period of forbearance ends, the borrower will be responsible for paying off the mortgage or any payments that they missed in full.
- Mortgage Modification: Most mortgage lenders would prefer to retain at least a portion of their money, as opposed to none of it. As such, a lender is usually willing to work with a borrower to renegotiate or modify the terms of a mortgage. For example, a lender may agree to extend the length of time that a borrower has to pay off the mortgage.
- Alternatively, a lender may keep the period of time they originally agreed to intact, but reduce the interest or the amount of monthly payments a borrower owes on the mortgage. For instance, three government agencies are currently aiming to offer a 25% reduction in borrowers’ mortgage payments so that they may keep their homes and increase their equity.
- Partial-claim loans: Some mortgage loans are supported by the federal government. There are also many government-sponsored loan programs that are supervised by the Federal Housing Administration (FHA). Mortgage loans that are issued by the FHA under such programs may allow a borrower to receive a small loan that can be applied to their mortgage balance.
- Although a government-sponsored loan may help a borrower to catch up with their mortgage payments, a borrower will also eventually need to pay off this smaller loan as well. Since COVID-19, however, certain borrowers may be able to receive this loan at a reduced rate.
- Reinstatement: Reinstatement refers to when a borrower pays off the entire balance on a mortgage loan or one that is in arrears. This payment will include any interest, penalties, or late fees a borrower accrued on the mortgage due to their missed payments. However, not all borrowers may be eligible for reinstatement.
- In most cases, a borrower will only qualify for reinstatement if they missed less than one or two installments. Anything exceeding this amount may disqualify them from being eligible for reinstatement.
What Are Other Foreclosure Alternatives?
In the event that a borrower has attempted or exhausted all of the alternatives provided on the list in the above section, they may have to pursue a different foreclosure option. Many of these alternative foreclosure options will involve having to sell or transfer the borrower’s ownership rights in the property to another party. These other foreclosure alternatives may also be used when a borrower no longer wants to own the property in question.
Some common examples of other foreclosure alternatives include the following:
- Deeds in lieu of foreclosure: This transaction is often used as an alternative to foreclosure. It allows the borrower to give back the deed to their home to the lender in exchange for being released from the mortgage. However, a borrower must first ask their lender if they would be willing to accept the deed in lieu of foreclosure. The reason for this is because the remedy does not apply automatically or without a borrower’s request.
- Short sales: A short sale is when a borrower sells their house at a price that is lower than the amount they still owe on their mortgage. It is also a type of pre-foreclosure sale, which will be discussed in further detail below. In such a scenario, the homeowner will not make enough money from the sale to pay off the remainder of their mortgage loan. Thus, the lender may either decide to forgive the remaining balance or they may require the borrower to pay back the rest over time.
- Pre-foreclosure sales: A pre-foreclosure sale may occur when a borrower defaults on their mortgage, but their lender has not yet initiated the corresponding foreclosure proceedings. In which case, a borrower will sell their property in an attempt to satisfy their mortgage loan debt. This not only allows the borrower to avoid a foreclosure action, but also the expense attached to such proceedings.
- The main difference between this and that of a short sale is that with a pre-foreclosure sale the borrower may not necessarily have to sell their house for less than what they owe on their mortgage.
How Has COVID-19 Affected the Foreclosure Process?
As previously mentioned, foreclosure regulations are mainly governed by individual state laws. This means that foreclosure laws tend to vary widely from state to state. Since COVID-19, however, several federal laws and administrative agencies have stepped in to help curb the impact that the pandemic has had on the foreclosure process.
Although some states were affected by COVID-19 worse than others, the following examples demonstrate the general ways that the pandemic has changed the foreclosure process throughout the United States:
- Mortgage lenders have extended many borrowers’ deadlines to make mortgage payments.
- Mortgage lenders have also been more willing to renegotiate or modify borrowers’ mortgage terms.
- A handful of states have enacted further protections for borrowers in danger of having their property foreclosed on and being evicted.
- Federal laws have suspended mortgage lenders’ usual practice of reporting missed payments to consumer reporting agencies, which in turn, has protected many consumers’ credit scores.
- Overall, it has reduced the number of foreclosure actions.
To find out more about how COVID-19 has specifically affected the foreclosure process in a borrower’s state, they should speak to a local foreclosure attorney for further legal advice.
Are There Any COVID-19-Related Foreclosure Alternatives?
Aside from asking a lender for a forbearance or that a current forbearance be extended, some other COVID-19 related foreclosure alternatives that a borrower may be able to request or use include the following:
- To extend the date that a mortgage becomes due;
- To lower the interest rate or the amount of monthly installments;
- To set up a balloon payment without interest that is due when the mortgage term ends;
- To receive enhanced financial assistance through various government-sponsored loan programs;
- To obtain a zero-interest, COVID-19 standalone partial claim;
- To get a loan reduction or COVID-19 recovery modification; and
- Various other payment reduction options that can be found under individual federal and state programs for people who have suffered a financial hardship due to COVID-19.
Do I Need a Lawyer for Alternatives to Foreclosure?
If you are at risk of having your property foreclosed on by a mortgage lender, then you should contact a local foreclosure attorney immediately for further legal advice regarding alternatives to foreclosure. An attorney who has experience in handling foreclosure actions can assist you in requesting a forbearance, reinstating your loan, or modifying the terms of your mortgage loan agreement.
Your attorney can also recommend other options besides foreclosure that may be better tailored to your personal circumstances, such as a pre-foreclosure sale or a deed in lieu of foreclosure. In addition, your attorney can provide legal representation for legal proceedings in court or during negotiation meetings with your mortgage lender.
Lastly, both state and federal foreclosure laws have been heavily impacted by the pandemic. Thus, you may want to ask your foreclosure attorney about any new modifications that were made to the foreclosure process in your state.