Definition of Foreclosure Options to the Homeowner

Understanding the different options a borrower may be offered when negotiating with lenders, is important. Below are the most common options that lenders may offer a borrower in default or that they anticipate being in default.

1. Reinstatement of Loan (Cure): This option is paying the lender everything that is owed in one lump sum to include missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor "subject to" the existing loans, who will cure. There is a risk to the homeowner that the lender may accelerate the loan because of the due-on-sale, and the homeowner no longer owns the property and has no recourse of the investor doesn't pay the loans.

2. Repayment Plan: This is a written agreement between the lender and the borrower. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.

3. Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, reduce the principal balance of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage. In most cases a Loan Modification will provide the best resolution for the borrower and lender.

4. Forbearance Agreement: The lender will allow you a period of time (3-6 months typically) of either low payments or no payments at all. Unless the loan term is extended, the later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date.

5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments.

6. Deed-in-Lieu: A Deed in Lieu is an option in which a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who can financially make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the “Cash for Keys” program.

7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough, which most often requires a substantial drop in the price.

8. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed, subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for the better for his credit than a completed foreclosure.

9. Refinance: The borrower may be able to refinance and get a new loan, but generally this is difficult because the borrower has little equity and poor credit. The new loan likely will have higher payments than the old loan.

10. Do Nothing: The worst choice for the seller, whose credit will be ruined, but he can stay in the home use for several months for nothing, save up some cash, and move when the lender or the high bidder from the auction eventually evicts the homeowner.