Different Types Of Loan Modifications For A Defaulted Mortgage
Foreclosure are costly and a very lengthy process, banks prefer to avoid them at all cost. Lenders created loss mitigation departments with established programs to assist with avoidable foreclosures. Here are some common types of loan modifications allowed by the lender that a borrower may qualify for depending on circumstances and financial standing.
Forbearance– A temporary short term grace period allowed by the lender that temporarily suspends or reduce mortgage payments. Usually during the end of this type of loan modification the lender expects to recoup all missed payments once the forbearance ends by lump sum or installments. Here are some types:
- Temporary Forbearance
- Military Forbearance
- Special Forbearance
Mortgage Modification – If a borrowers income has been reduced and can not pay the current mortgage payment, the bank may restructure the existing mortgage to a more affordable level. With this type of modification, a borrower needs to prove they can afford the house. Here are some types:
- Rate Reduction
- Loan Extension
- Principal Deferral
- Repayment Plan
- Workout Agreement
Partial Claim – This one is only for FHA mortgages. Your lender may be able to obtain a one time payment from the FHA Insurance to bring the borrowers loan current. An interest free Promissory Note must be executed and a lien will be placed on the property until.
Short Sale – If a borrower is going through financial hardship and owes more than what the house is worth, including all liens, all mortgages, and any other cost associated with the property. The borrower must prove to the bank they can not afford the house any longer. Check out my FAQ page for more information on short sales.
Deed-in-Lieu of Foreclosure – As a last resort effort, it allows the homeowner to give the property back to the lender to avoid a foreclosure. There are one or two criteria’s that must be met:
- The borrower does not qualify for a loan modification or short sale.
- The home did not sell on the market.
- The borrower does not have another defaulted mortgage.
For any loan modification that may create a deficiency (the difference between what is owed and the property value) request the lender waive it and GET IT IN WRITING! Banks usually do not forgive late fees and penalties, the cost is either added to the back end of the loan, or, with FHA loans a second lien will be created.
Borrowers facing a foreclosure can contact the federal Making Homes Affordable Program at 888-995-HOPE (4673) for assistance in keeping their home.
If you are in the state of Georgia or Metro Atlanta Area and thinking of a short sale or have questions, contact me for a consultation.