Benefits with Commonwealth of Virginia Members

Saving Your Home from Foreclosure

If you feel like you won't be able to keep making your monthly mortgage payment or you have started to fall behind on your payments, there could be options to save your home from a foreclosure, but you should act quickly. Here are the typical options a lender may present to you if you want to keep your home.

Home Retention Options

Reinstatement

Many states will you give you the right to reinstate your mortgage if you have missed payments. Reinstating will bring the mortgage current again, and you can continue to make your normal payments. In order to reinstate you will need to be able to pay the total amount in arrears.

Repayment Plans

If you have missed one or more payments and you cannot afford the lump sum payment to get caught up, you could try to negotiate a repayment plan that would allow you to make payments over time on the missed amount on top of your normal mortgage payment. Agreeing to a repayment plan will allow you to stay in the home and avoid any foreclosure from happening.

Forbearance Plan

Lenders will sometimes agree to reduce or eliminate the monthly payment entirely for a short period of time. It would be common to see a forbearance plan for three to six months. Typically once the forbearance plan is over you will be required to pay back in full the amount all the payments were reduced by. For example, if your monthly mortgage payment is $1,000 a month and you agree to a three-month forbearance plan that postpones your payment entirely, you will then have to pay that amount once the forbearance plan is over. That means you would owe $3,000 plus your normal mortgage payment. Most people won't have this money saved up, so they might apply for a loan modification at this point (which will be discussed later). This is a common resolution for someone who recently lost a job.

Loan Modification

A loan modification is when the lender agrees to restructure the current mortgage in order to lower the monthly mortgage payment and bring the loan current if you've fallen behind on it. You will need to contact the lender to request mortgage assistance. Typically you will then be required to fill out a financial assistance packet that will ask for specific financial information. This will usually include writing a financial hardship letter explaining the hard times that you are going through and how they have affected your ability to make your normal payments. Lenders have several ways that they may accomplish the restructuring. Some common ones are lowering the interest rate, converting the loan to a fixed rate if it is variable and that fixed rate will be lower than the variable rate, and extending the loan's repayment period (an example would be a 30-year fixed to a 40-year fixed). The lender may even try to re-amortize the loan, which involves taking the missed payments and adding those to the principal balance, resulting in a new loan. The last option will help bring the loan current but can sometimes keep the payment the same or even increase it. If the lender decides to lower the interest rate during the re-amortizing process, that could result in a lower monthly payment.

Home Nonretention Options

Sometimes the above options don't make sense for your situation, or you may not even want to keep the home but still want to avoid a foreclosure. A lender may present these nonretention options if that is the case.

Short Sale

A short sale might be an option you'd want to pursue if your home was worth less than what you owed and you could no longer afford the monthly payment. Rather than letting it go to a foreclosure, you could try to work out a short sale with your lender. You would typically need to have gone through some type of financial hardship and would need to document that hardship.

For example, say you purchased a home a few years back for $250,000. You put a down payment of $10,000 and financed the rest for $240,000. The home has decreased in value due to hard economic times and is now worth $200,000. You have recently gone through a divorce and want to move but cannot sell the home for what it is worth. You decide to reach out to your lender and try to negotiate a short sale deal. The short sale deal will allow you to sell the home for what it is worth, and the lender will forgive any balance that is still owed to the lender after the sale.

Before the sale goes through, it will be key to get some type of written document that says the lender will be waiving any deficiency balance. It would also benefit you to speak with your tax advisor, as a short sale can often to lead to some tax consequences. Also, if you use a real estate agent to sell the home, it is recommended that you use one with short sale experience.

Deed in Lieu

A deed in lieu is another nonretention option your lender might present to you. It is when you transfer ownership of the home to the lender in exchange for the lender canceling the loan. The lender will typically hold on to the property or try to sell it. You would also want to request that the lender promises to forgive any balance that might be left over if the proceeds from the sale of the home do not cover the full loan balance. You will again need to provide evidence of some type of financial hardship that occurred in order for your lender to consider this option. Again, it is beneficial that you discuss any tax consequences with your tax advisors if you choose this option.