Homeowners dealing with the threat of foreclosure should know about as many options as possible, if they are attempting to save their houses before they run out of time. Some of these options fall under the category of "loss mitigation," which usually refers to a third party (usually either third party company or a division of the bank) that helps negotiate with borrowers to find solutions to foreclosure.
But under this category of loss mitigation fall a number of solutions to foreclosure that may apply in various circumstances. Some lenders may not offer each of these solutions right from the start of negotiations, but homeowners can always request more information about them if they believe one may be appropriate for their foreclosure situation. The seven solutions detailed below are typically classified as loss mitigation.
Cash for keys. In a cash for keys agreement, homeowners are offered a set amount of money from their bank to move out. The offer is usually presented by mail or in person through a local third party, such as a real estate agent or law firm. Banks offer such solutions in order to negotiate a peaceful transfer of a foreclosed home and give the former owners some cash in their pockets for moving expenses.
Deed in lieu. A deed in lieu of foreclosure can be given to the lender by homeowners who are just trying to unload the house, avoid foreclosure, and move out. Borrowers offer to give the deed to the property back to the bank in return for the mortgage company not going through with the foreclosure process. At that point, the bank would be able to list the house for sale and attempt to recoup some of its losses.
Loan modification. Much press has given to the idea of modifying mortgages that are in foreclosure. There are a vast number of ways to do this, from lowering the interest rate to extending the repayment period of the mortgage. The only real drawback to this solution is that banks are rarely that enthusiastic about modifications, because a properly structured one will benefit homeowners more than lenders.
Partial claim. For homeowners with a mortgage guaranteed by the FHA, a partial claim may be used to give the bank a one-time payment from the government in order to stop foreclosure. In exchange, a lien is placed on the property, although the lien has a zero percent interest rate and does not have to be paid back until the first mortgage is paid off or the home is sold or ownership is otherwise transferred.
Short sale. A short sale allows borrowers to sell their property for less than the total amount that they owe to the lender. All of the mortgage companies have to accept a reduced payoff for the sale to close, or the homeowners will have to bring cash to closing to pay off any remaining liens. While this can help borrowers avoid losing their homes, banks are not very quick to approve short sales.
Short refinance. With this method, the bank agrees to lower the total due on the mortgage in order to facilitate a refinance through another lender. Oftentimes, homeowners may be approved for a certain amount of money to refinance, but the amount they owe on the first mortgage along with fees and unpaid interest makes it impossible. A short refinance allows the refinance to go forward and the foreclosure to be ended.
Special forbearance plan. Under a special forbearance, homeowners can make a lower payment or have no payment at all for a certain period of time. This can be more easily negotiated well before homeowners default, as banks will not be fond of borrowers who ask for lower payments after they have begun missing them. In addition, the homeowners will eventually need to pay back any payments they missed.
Homeowners facing foreclosure have the problem of not knowing what options may be appropriate for their individual situations. And unfortunately, the lenders are often no help, pushing borrowers into expensive repayment plans or filing fraudulent lawsuits alleging foreclosure. However, the more that they know about various solutions that will help them save their homes, the less stressful the situation will be.
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