People borrow money to purchase the homes they live in. An individual purchases a home through a mortgage agreement. A mortgage agreement is between the individual and the entity providing the money for purchase.This entity is typically a bank or other financial institution, and is referred to as the “mortgagee.” The person receiving the money is the homeowner, who is referred to as the “mortgagor” (buyer).
Under the mortgage agreement, the mortgagor must make a series of payments to the mortgagee, called mortgage payments. If a mortgagor misses one or more payments, the mortgagor may exercise the right of foreclosure. This right allows the mortgagee to take ownership of the house from the owner, and to receive all missed payments.
Are there Alternatives to Foreclosure?
There are a number of alternatives to foreclosure. Some of these allow the mortgagor to remain in the home. Others require that the mortgagor sell the property, or give it back to the mortgagee (lender). The type of alternative can depend upon the buyer’s financial situation.
In addition, the mortgagee may only offer some of the alternatives. The buyer may qualify for only some alternatives. The buyer can contact the lender to determine what options are available.
What Are Alternatives That Allow the Mortgagor to Keep the House?
There are a number of alternatives to foreclosure proceedings. The most common alternatives to foreclosure proceedings include the following:
- Mortgage Modification: A mortgage modification is a modification to the terms of the mortgage agreement that allows for more manageable payments. Modifications include extending the term of the mortgage, which allows a borrower a longer time to pay it off, or reducing monthly payments or the rate of interest;
- Temporary Forbearance: A temporary forbearance is a temporary suspension of mortgage payments. A mortgagee may give the buyer a temporary forbearance if a buyer is experiencing financial difficulty, such as reduction in income, termination of employment, or medical hardship. During the forbearance period, the mortgagee may still charge interest. Once the period of forbearance is over, the mortgagor is responsible for full payment of the mortgage;
- Reinstatement: Reinstatement is an option under which a mortgagor, typically in one, lump sum, pays the entire amount of arrears (mortgage amounts past due), along with any interest, penalties, or late fees incurred as a result of missed payments. Not all borrowers are eligible for reinstatement. Upon reinstatement, the buyer then resumes paying the mortgage; and
- Partial-Claim Loans: Certain mortgages are insured by the federal government. The federal government agency that insures the mortgage is known as the Federal Housing Administration. These mortgages may give the buyer the right to receive a “partial-claim” (a sum that is less than the mortgage owed) loan from the Department of Housing and Urban Development, to be applied against the mortgage. The partial-claim loan is interest free, and is designed to allow a homeowner to catch up on missed mortgage payments. The HUD loan must be paid off when you pay off your first mortgage, or when you sell your house.
What Are Other Foreclosure Alternatives?
Other foreclosure alternatives involve selling or transferring ownership of the property. These alternatives often used when reinstatement, forbearance, or modification have already been exhausted, or are not available. These alternatives are used when the buyer does not want to own the home any more.
These alternatives include:
- Pre-Foreclosure Sale: “Pre-foreclosure” means the buyer has defaulted in payment, but the mortgagee has not yet instituted foreclosure proceedings. In a pre-foreclosure sale, the buyer sells the property, allowing the buyer to satisfy the mortgage debt. A pre-foreclosure sale allows the buyer to avoid the expense associated with a foreclosure proceeding. The buyer avoids embarrassment from the foreclosure being part of the public record;
- Short Sale: A short sale is a specific type of pre-foreclosure sale. A short sale is a sale in which the home sells for less than what is owed on the mortgage. In such instances, the buyer does not receive enough money from the sale to pay off the rest of the mortgage. A lender may forgive the money owed on the mortgage after the sale. The lender can also require the buyer to pay back that money; and
- Deed in Lieu of Foreclosure: In this transaction, the buyer agrees to transfer title to the property (the deed) back to the lender, thereby satisfying the loan. In this situation, the buyer is responsible for finding a new home.
Do I Need a Lawyer for Alternatives to Foreclosure?
If you are facing foreclosure, you should contact a foreclosure attorney. A foreclosure attorney near you can assist you in requesting a loan modification, forbearance, or reinstatement.This attorney can also, can assist you with a deed in-lieu of foreclosure, or a pre-foreclosure sale. The attorney can represent you in negotiations with the lender.