Loan Modification FAQ
1/ WHAT IS FORECLOSURE?
Foreclosure is a legal procedure by which a secured creditor can sell the encumbered property, terminate the rights of the borrower/owner and apply sales proceeds to pay off the creditor's claim.
2/ WHAT IS A SHORT SALE?
A short sale is when a lender, whose loan is secured by real property, agrees to accept less than the total amount owed on its debt in exchange for releasing its lien on the property. If there are multiple lien holders on a property, the borrower must reach an agreement with each one.
3/ WHAT IS A LOAN MODIFICATION?
A loan modification is a negotiation between a borrower and a lender whereas the terms of the loan are restructured to fit with your current financial situation without the need of refinancing.
4/ WHAT ARE OPTIONS FOR BORROWERS IN FORECLOSURE?
1- Reinstatement: This is when you give the bank all of the back payments, get current with your mortgage payments, and start making your regular monthly payments again.
2- Partial Reinstatement: This is where you would pay a percentage of the back payments (usually half) and then you work out a repayment plan for the rest of the debt you owe.
3-- Refinance: This is when you take out a new mortgage to pay off the old one. This option is sometimes a good one, but many times it is the short term answer to a long term problem. Make sure to contact a legitimate lender or mortgage person, and be very carefully of large fees and higher interest rates. You also need to be aware of the terms on your old mortgage and identify if there is a pre-payment penalty.
4-- Forbearance: This is when your bank agrees to accept a lower mortgage payment (or no monthly payment) for a short period of time. At the end of this agreement, you are obligated to bring the account current.
5-- Loan Modification: The bank agrees to change the terms of the mortgage. This can happen in multiple ways - reducing the interest rate, or extending the term of the mortgage and adding the arrears to the unpaid principal balance of your loan.
6-- Partial Claims: Depending on the lender offering this option, it goes by several other names: Claim Advance, Pre-Claim Advance, and PMI Advance Claim. What this option usually involves is the mortgage insurer or mortgage guarantor making an interest free or low interest loan to the borrower in an amount sufficient to bring their mortgage current and remove them from foreclosure. Repayment of this new loan may be delayed for several years or not even due until the property is resold.
7-- Short Sale: The bank may let you sell the home even if you owe more than the property is worth, and the bank will agree to accept the lesser amount as payment in full. You need to work with an experienced Real Estate Agent who is a Certified Short Sale Specialist so they can correctly document the transaction and assist you in completing this process with your lender.
8-- Deed-in-Lieu: You cannot afford to keep the home, so you deed the property back to the bank. The bank will not accept a deed-in-lieu if there are other liens on the property. Be careful and do not do a deed-in-lieu if there is an option where a short sale is possible, or if you have equity in the property.
9-- Make Whole Sale: You sell the home and the money from the sale pays off the mortgage and any other liens on the property. This will only work if your home is worth significantly more than you owe on it.
10-- Using Military Status: If a borrower is a member of the armed services on active duty and extended deployment, they can request a court to temporarily postpone a foreclosure or eviction and even reduce the interest rate on their mortgage payments.
Disclaimer: We are not accountant or attorney. It is important to consult with a professional tax attorney or accountant when considering the implications of the law upon your individual situation.
