Reinstatement

A reinstatement brings the loan current, including all arrears, late fees, impounds and attorney's fees. In other words, you need enough money to pay all arrears and related fees at once. For some homeowners this may seem impossible. You must analyze the situation and look for resources within reach to generate such an amount.

• One such resource could be a 401K, or other type of retirement fund, to borrow against or cash out in an emergency. Be aware, however, of substantial tax and early withdrawal penalties.
• Personal items may be sold, such as a second car or boat.
• Friends or family may be able to help with a personal loan, or sometimes a church can be of some assistance. One important issue to remember is that you should not incur more debt without being confident of your ability to repay at a later date, and only then if you have overcome the original hardship. Otherwise, you may be risking possible bankruptcy or foreclosure.

Forbearance

A forbearance may be difficult, but not impossible to obtain. It means the lender agrees to suspend the payments for a period of time. In order for the lender to agree to this type of workout, the homeowner must show the ability to fully reinstate the mortgage within a realistic time frame. For example, a person is to receive back pay from an employer and this is guaranteed in writing. The homeowner could submit this letter of assurance to the lender and promise to reinstate the mortgage when the back pay is received. An anticipated court settlement, child support income, commission or quarterly bonus from an employer, inheritance, or large tax refund are possible reasons a lender may agree to a forbearance.

Repayment Plan

A repayment plan is a lender-approved payment plan to catch up on arrears. This means that the lender will allow a regular payment with additional monies to be paid over a specific period of time to eventually bring the loan current. Often this payment plan will include late fees. The degree of delinquency determines whether the lender will require an initial large payment. The lender will want to receive as much as possible to bring the loan current. It will be to your advantage to provide the lender with a budget analysis so the lender can see what is reasonable. You should not set up a forbearance you cannot afford. If a forbearance agreement is reached and adhered to, collection calls usually stop. The agreement should be in writing.

FHA Special Forbearance

FHA allows a forbearance if you are up to the equivalent of twelve months PITI in arrears. An agreement may be reached with the lender to suspend or reduce payments until the hardship is over. A payback plan can then be arranged not to exceed eighteen months. As the interpretation of this workout plan varies so widely, it is best to work with the Loss Mitigation Department for their acceptable guidelines. FHA has delegated authority to the lender to negotiate long term forbearance plans.

Refinancing

Refinancing is creating a new loan, either with the same lender or a different one. Keep in mind that refinancing will require the same criteria needed to purchase a home. Debt-to-income ratios, property appraisal, and credit history will all be determining factors to refinance approval.

When considering a refinance, do not forget to calculate the cost of refinancing, and how much less the new interest rate will be. There are calculations a loan officer can do to determine which is the best loan for you. A refinance will increase the total interest paid on a loan. Be sure it does not include a prepayment penalty so that it can be paid down when financial circumstances improve.

Streamline Refinance

A streamline refinance is different from a conventional refinance because it is usually financed by the same lender/servicer. It is less expensive to originate, and is limited to the existing principal balance. There is no appraisal, and credit history is not usually a critical factor. The purpose of the streamline is to rewrite the terms of a loan to reduce the interest rate to the prime rate and/or lengthen the term of the loan. Streamlines will vary in cost, and guidelines may vary among different types of mortgages such as VA, FHA and Conventional. The benefit is to reduce the mortgage payment or absorb the amount of arrears to bring a loan current.

Second Mortgage

A second mortgage may help a homeowner to reinstate the first mortgage. It may not always be the best solution. Often the second mortgage can cause the homeowner to become overextended. Usually the homeowner will use the available equity to consolidate other debts. This may help lower the total monthly living expenses now, but if the initial hardship has not been corrected, there is a good chance the open credit lines will be used again causing even more indebtedness. Also, the homeowner will usually pay much more for this debt over time.

Recast/Modification or Capitalization

Recasting is simply placing the arrears at the end of the loan and continuing with the regular monthly payments until the principal balance is paid in full. It is rarely done without also modifying the loan. Modifying the loan means making possible changes to the interest rate or making some other change to the loan. It is less expensive than a streamline refinance and the existing loan is not paid in full. To qualify for this solution, your hardship would have to be over. It is particularly helpful when your net income is less than it was before the default.

Extension

This option is not one in which the mortgage lender is necessarily involved. It is an option for homeowners who have auto loans. As a resource for freeing up monies to bring mortgage loans current, it may be possible to defer your auto loan payments for up to three months. You will need to contact your auto lender to inquire. Keep in mind that not all companies will offer this option.

Partial or Advance Claim

This option is available for FHA loans, and conventional loans with mortgage insurance. If the hardship is over, but it is not possible to pay the arrears, the insurance company will consider paying the arrears for the borrower.

If the loan is an FHA loan, a lien will be placed against the property and payback will be required when the first mortgage has been paid in full, or you leave or sell your property. There will be no interest attached to this loan. However, if the loan should default at a later date, the amount paid will be subtracted from the amount required to make the lender whole. The loan must be at least four months, but no more than twelve months delinquent, not in foreclosure, and you must be able to make full mortgage payments.

If you have an insured conventional loan, the insurance company will usually request a payback arrangement immediately and charge zero to three-percent interest.

Refunding

This option is for VA loans only. As a last resort, VA will buy back the loan from the lender, modify the terms of the loan either temporarily or permanently to allow the borrower to stay in the home.

Bankruptcy Chapter 13

Bankruptcy is a legal process that may slow or prevent foreclosure. Chapter 13 is a personal financial reorganization under which consumers pay back their creditors, including mortgage arrears, under the supervision of a court appointed trustee. Usually a homeowner can pay back the arrears over 36 to 60 months. A lender may ask the court for a lift of stay, meaning that the mortgage may not be included in the bankruptcy, and if granted, the lender can then pursue foreclosure.

A Chapter 7 bankruptcy is for unsecured debt only and will only stall a foreclosure thirty to sixty days. It liquidates most other unsecured debt, possibly providing enough financial relief to continue making mortgage payments.

This concludes the workout solutions available for those who want to keep their home. If your intention is to remain in your home, consider recording a Homestead Declaration. Depending on your age, and the way in which title is held, this can protect between $50,000 to $125,000 of equity for up to six months after the sale of your home to invest in another primary residence before a judgement lien must be paid. Even if you do not currently have equity in your home, it is still wise to do this. As you pay down your mortgage and the economy improves, your equity will increase.

The following are possible workout solutions for homeowners who will have to vacate the home but who want to avoid foreclosure.

Assumptions

The Deed of Trust will indicate if a loan is assumable. If not, the lender may make an exception to allow an assumption to avoid foreclosure. An assumption is the transfer of liability on an existing mortgage loan contract from the original borrower to a new owner of the mortgage property, usually requiring qualification by the lender. If the loan is paid by the buyer without lender knowledge, it is considered taking the loan "subject to" the Deed of Trust and could cause the loan to be accelerated, and reflect adversely on the seller's credit. If the lender is notified and requires buyers to qualify for the loan, a release of liability is usually signed absolving the seller from future credit implication. The benefit to the buyer may be a lower down payment, and the benefit to the seller can be an increase of potential buyers.

Sale of the Home

The homeowner may want to consider selling if there is equity in the property. The sales price must cover the arrears, the mortgage balance, agents fee and settlement fees, second mortgage, if any, and other liens that may be of record. Upon notification, lender may hold off foreclosure proceedings and/or seller may want to discount sales price to attract buyers.

Short Sale of the Home

This is the term used for the process that allows a homeowner to sell a property for an amount less than what is owed to avoid foreclosure and preserve their credit rating. The lender must approve the sale, there must be a hardship cause, and the difference between the sales price and amount owed may be subject to income taxes. This term is used for conventional loans. If your loan is FHA, it is called a Pre-Foreclosure Sale, and if you have a VA loan, it is called a Compromise Sale. This must be an "arms length transaction," meaning you cannot sell to a relative or close friend. FHA has set guidelines for short sales that have become the standard for all loan types. Generally, the requirements are: you must occupy the home, you must be at least three months in arrears, and there must be a documented hardship before this type of sale will be permitted. However, just as there are all types of hardships, there are also "variances" for reasonable exceptions to the rules. If a short sale is necessary, the first and most important thing you should do is enlist the help of a professional realtor who has successfully handled many short sales.

The following guidelines (variances allowed) will be reviewed upon request of short sale: the appraised value is at least 70% of amount owing, proceeds of the sale should be at least 87% of the value, and the sale must close within 90 days of lender approval. Borrowers with FHA loans are required to receive counseling from a HUD approved counseling agency verified by a signed Attachment B, and will receive $1000 credit for the successful completion of a Pre-Foreclosure Sale. If escrow does not close within the 90-day limit, but closes shortly thereafter, the credit is reduced to $750.00.

Deed-in-Lieu of Foreclosure

If a sale is not possible, the deed may transfer to the lender in exchange for the cancellation of mortgage debt. HUD pays some costs involved for FHA borrowers, and credits them with $500.00. Using this option can possibly avoid some of the negative credit connotations associated with foreclosure. This should not be done if you have equity, as it will be forfeited. The borrower may request this, but the deed-in-lieu must ultimately be accepted by the lender and must be the result of an unavoidable hardship. It will not usually be accepted unless a good attempt at selling the home has proven unsuccessful. A future lender's conception of credit implications will vary as to whether it is as devastating as a foreclosure.