If financial struggles have prevented you from being able to keep up with your mortgage payments, you may be considering the possibility of foreclosure. Foreclosure, in addition to being emotionally distressing, is scary because it deals a harsh blow to a credit record. It also doesn't necessary offer you a clean break from your financial distress because your lender may need to get more money from you if it doesn't make enough off of the foreclosure sale. Before you seriously consider the big "F," know that by looking into other options, you might be able to at least partially salvage your credit score and maybe even your home.
Forbearance and Reinstatement
A forbearance is a temporary agreement between you and your lender to delay payments for a brief time. You will need to present proof to your lender that you can get the necessary funding (such as with a slip of paper that confirms you will receive a good-sized bonus) to quality for forbearance. Lenders will often combine forbearance with a reinstatement, which takes place when you pay all outstanding debts in one lump sum on a certain date.
Lender Assistance
Lenders often strike up deals with struggling homeowners in order to spare both parties an even bigger headache in the future. Figure out who your primary lender is and talk to someone about assistance options. Two common options are the repayment plan and loan modification. A repayment plan will offer you a fixed portion of time to gradually catch up on payments by adding a portion of outstanding debts to your regular payments. Lenders can also modify the terms of your loan by adjusting the amortization (pay off) table or reducing your interest rate to make your monthly payment more affordable.
Short Sale
If you can't strike up a sufficient repayment deal with your lender or you simply can't afford to make adequate payments, you may be able to convince your lender to do a short sale. A short sale is a deal between a homeowner and a lender to sell a house for less than it is worth. The lender takes the financial hit and your credit report will show a "pre-foreclosure in redemption" rather than a harsh foreclosure. In order to convince a lender, you will likely need to have a short sale offer already on the table from a buyer.
Deed in Lieu of Foreclosure
This last resort option allows you to give your home to the lender in order for the lender to cancel the loan. With this option, the lender will promise not to begin taking foreclosure measures. You will likely have to put your home on the market for about three months before the lender would be willing to agree to a deed in lieu of foreclosure. It isn't an ideal option, but it will show up less ruthlessly on your credit score than a foreclosure would. Just make sure that you get your financial agreement in writing so that the lender can't legally tell you later to make up the difference between what the house was worth and the actual sale amount.
Pre-Foreclosure Sale
A pre-foreclosure sale allows you to sell the property for less than you owe and hand it to the lender. This option may be in the cards for you if you are at least two months behind on your loan, if you are able to sell your house within three to five months, and if a new appraisal by the lender meets Housing and Urban Development (HUD) value requirements.
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