A foreclosure can ruin both your finances and your credit score. Don’t resign yourself to fate if foreclosure is looming. Evaluate the various techniques for stopping or avoiding foreclosure, and try the relevant ones. Below are some of these techniques.
Forbearance
Ask your lender for forbearance if you are temporarily short of cash. A forbearance agreement can take either of these two forms:
- Reduced payments
The lender agrees to lower payments until you overcome your financial emergency. - Temporary pause
The lender allows you to skip several months while you solve your financial difficulty.
Your lender will only agree to forbearance if you can prove that your financial difficulty is temporary. For example, a lender may agree to forbearance if you have suffered a medical emergency, natural disaster, or unexpected job loss. You must prove your ability to resume normal payments after the forbearance period.
Refinancing
Ask for a refinance if you can’t afford the repayments even with a forbearance. With a refinance, the lender extends you a new mortgage so that you can pay off the existing one and start afresh. A refinance can help if:
- It comes with reduced interest rates
- It lengthens your mortgage term
Both of these options reduce your monthly repayments. Thus, the refinancing option is a long-term solution compared to the forbearance option.
Modification
Another option is to modify the terms of your existing mortgage. You can modify:
- The mortgage term
- The interest rate
- Your mortgage principal (in extreme cases)
A modification effectively reduces your monthly repayments – just like refinancing. The main difference is that a modification keeps your current mortgage while a refinance replaces it with a new mortgage.
Repayment Option
Your lender may agree to a new repayment plan if you are behind on your payments. In this case, the lender spreads out your past due amounts over several months. You pay bits of your missed payments every month on top of your usual payments. A repayment option may work if you had a financial difficulty that you have now overcome.
An example is if you lost a job and missed your payments for a few months. Once you get a new job, your lender may agree to spread the missed payments over the next few months.
Short Sale
A short sale means you sell your house for less than the outstanding mortgage. For example, you can sell a house for $200,000 even if you still owe $230,000 on it. The lender takes the sale proceeds to repay their mortgage. Your lender will only accept a short sale if they are convinced of your ability to meet your mortgage repayment obligations.
The main disadvantage of a short sale is that you lose the house. However, the lender releases you from the mortgage obligations, which is helpful if you are short of cash.
Bankruptcy
Lastly, you may also file for bankruptcy to avoid foreclosure. A bankruptcy application can help you avoid foreclosure in three main ways:
- The bankruptcy can temporarily stop the foreclosure process and give you time to try other foreclosure prevention methods.
- A Chapter 7 bankruptcy discharge can wipe out your mortgage (although you might lose the home).
- A Chapter 13 bankruptcy discharge can help you work out a repayment plan and keep your home.
The bankruptcy option is attractive because the automatic stay order comes from the court. As such, the process doesn’t depend on the lender’s agreement.
The above techniques are not the only option to stop foreclosure. The Madden Law Firm has many years experienced in real estate law. We can give you an in-depth overview of all the options and advise you on the best one for your situation. Contact us today for a consultation so that we can advise you on the best way forward.
