Avoiding Foreclosure
Banks and other lenders don't benefit from foreclosure, and they prefer not to be involved in it, but if the borrower can't pay the mortgage, lenders are forced to take back the property and sell it to recover their funds. This is why lenders are very careful about screening borrowers and appraising the properties — they want to be sure that they can recover their money if foreclosure becomes necessary.
Foreclosure is an expense for lenders, so they nearly always try to resolve past-due payments before they set the process into motion. Here are some of the options a delinquent borrower has:
Reinstatement: A borrower can ask to have an account reinstated when he is behind in payments but can promise a lump sum to bring the account current by a specific date.
Forbearance: A borrower is allowed to delay payments for a short period, with the understanding that another payment option will be used at the end of that period to bring the account current. A lender might combine forbearance with reinstatement when the borrower knows that funds will be available by a certain date.
Most real-estate loans contain a
Repayment plans: If an account is past due but the borrower can now make payments, the lender might agree to add a portion of the past-due amount to a specified number of monthly payments until the account is current.
Mortgage modification: The lender may agree to modify a mortgage for someone who can now make payments but would have a difficult time catching up on late payments. The past due amount might be added into the existing loan so that it could be financed over a long period of time. The lender might even agree to extend the length of the loan if the borrower cannot make payments at his former level.
Selling the property: If a catch-up is not possible, the lender might agree to put foreclosure on hold to give the borrower time to sell the property.
Deed in lieu of foreclosure: This occurs when the borrower gives the property back to the lender, and the lender forgives the debt. The lender might require the borrower to attempt to sell the property before offering this option, and it might not be possible if there are other liens against the property.
FHA and VA Loan Solutions
Borrowers who have an FHA loan can sometimes receive a one-time payment from the FHA Insurance Fund to bring them up to date. For a borrower to qualify, the loan must be at least four months but no more than twelve months past due, and the borrower must be able to begin making full mortgage payments immediately.
The loan must eventually be repaid. The borrower signs an interest-free promissory note, and HUD places a lien on the property. The lien becomes due when the first loan is paid or the property is sold, whichever occurs first.
The Veterans Administration (VA) offers financial counseling for borrowers at their regional offices. Staff at those offices have been trained to help borrowers find solutions to avoid foreclosure.
Moving on to Foreclosure
Once a lender decides that an owner can't or won't work to resolve past-due payments or other problems, it moves forward to acquire the property. The lender files all required legal documents at the courthouse in the county where the property is located — or its equivalent. The documents state when the property will be sold to satisfy the lien. Notices are printed in local newspapers, and some localities put them on the Internet.
Others who have liens against the property have a stated amount of time to come forward, at least thirty days but often longer. The lender might even choose to add other lienholders to the lawsuit.
During the time prior to the sale, the property owners can file documents to try to stop or postpone it. They might file bankruptcy, since that action puts at least a temporary halt on the foreclosure process.
Some states have initiated investigations into the practice of filing for bankruptcy solely to stop or stall a foreclosure, without ever intending to move forward with the process or enter into a bankruptcy repayment plan. Companies or individuals who help borrowers initiate fraudulent bankruptcies might be subject to fines.
