When the loss of your home becomes a real possibility, you need to be proactive in addressing the problem. It also helps if you know the different possibilities and options your lender may offer you. As discussed in the article “Face Your Mortgage Issues Directly and Realistically” your lender would rather not foreclose and face the expenses involved if something can be done that is less costly. With the variety of solutions available, there is a good possibility that something can be done that will either save your home or at least lessen the impact of losing it.

Since the article referenced above describes the information you will need to gather and the steps you should consider in order to give yourself the best likelihood of preserving your home, it will not be reiterated here. Instead this article will focus solely on the different loss mitigation possibilities that lenders have been offering to prevent foreclosures.

The circumstances that put homeowners into distress fall under two categories: short term and long term. Short term circumstances are situations that have occurred that either increased expenses or caused a loss of income for a limited time. Long term circumstances are permanent changes in income or expenses such as divorce, changing to a lower paying job, ongoing medical expenses or even unmanageable increases in the mortgage payment due to an adjustable rate.

Short Term Solutions

When your problems are caused by a temporary setback but you know that you will be able to afford your payments in the future, you should ask about reinstatement, a repayment plan, or forbearance.

• Reinstatement is the repayment of the full amount of the delinquency plus any penalties in one lump sum on or before a date that you and your lender have agreed upon. In many cases, the lender may waive some or all penalties.

• A repayment plan is the adding of a portion of the amount past due to your regular payments for enough time to bring the account back to a current status. Since this will increase your payments for a period of time, you need to be sure that you can handle the larger payment before you agree to this option.

• Forbearance is the suspending of payments for a fixed amount of time. At the end of the forbearance, you would need to either bring the account current in a lump sum, or have an amount added to your mortgage payment to bring the account current over a limited amount of time. Again, be certain that you will be able to handle the lump sum or increased payments when the forbearance ends.

Long Term Solutions

When your ability to repay the loan has been permanently altered or you will not have the ability to repay delinquencies in a lump sum or by paying extra, you may want to look into a loan modification or a partial claim (if your loan is insured).

• A loan modification is a permanent change in the terms of your loan. Creditors have been getting more creative in the ways that they are working with homeowners. Some types of modification are as follows:

o Lowering or fixing the interest rate: A new trend for lenders is to offer very low interest only rate for a fixed amount of time with the hopes that the equity in the home will recover in time to allow the      homeowner the ability to sell before the rate adjusts. The interest only option is being allowed for as much as 10 years. In other cases, the lender simply reduces the rate to a lower fixed or variable rate.

o Lowering the principal: By reducing the balance owed on the loan but keeping the other terms the same, the payment will be reduced for the homeowner and the negative equity that can keep the homeowner from selling the house is reduced or eliminated.

o Extending the term of the loan: By increasing the amount of time to repay the loan, the payment is reduced. This can give you a manageable payment, but can also greatly increase the amount of interest you will pay and slow the growth of your equity.

o Adding missed payments to the balance of the loan: The payment is not changed, but you will not have to pay extra in the short term. In the long term you will pay additional finance charges and the total number of payments you will make will increase, but in the short term you are able to resume making normal payments and your account will become current again.

o Combination of any or all of the above: More frequently than in the past, lenders have been making more than one modification to a loan to keep people in their homes.

• Partial Claims are available only to people who have mortgage insurance. You may be able to obtain an interest free loan that will bring your loan current and the loan will not have to be repaid for several years.

The HOPE for Homeowners Act of 2008

Due to the recent downturns of our economy, the government implemented a bailout plan for distressed Americans who have bought homes in the last few years or during the high point of the home market.. The plan which is now in effect, allows the FHA to insure up to $300 billion in refinancing loans. The target is homeowners whose loans have become unaffordable and may not be able to sell the home because it is worth less than the mortgage balance. This plan would create some immediate equity for the homeowner although that equity would be shared with the FHA if the homeowner sold or refinanced the house at a later date.

Under the act, the FHA can guarantee a 30 year fixed rate mortgage that does not exceed 90% of the current appraised value. The borrower must be able to prove income, meet FHA loan to income standards, and the appraisal must meet FHA guidelines.

Nationwide there have been extreme drops in housing values which means the lenders of these over-financed homes are asked to take an enormous loss in order to accept the refinancing deal. In most cases, the borrower either has not qualified for the FHA loan or the lender did a loan workout that kept the loss it absorbed to a minimum. This plan which was implemented last year would have been great for overextended homeowners if the lenders could utilize it more. Because of the deep losses the lenders would suffer, however, most often they choose to do their own internal loan modification.

When Keeping Your Home is Not an Option

There are circumstances that make it impossible to retain ownership of a home. People who are being forced to relocate but cannot sell their home or people that have a permanent loss of income that is so great that none of the loan modification options will help them would fall into this category. A short sale, assumption, or a deed in lieu could help you to avoid foreclosure.

• In a Short Sale, your lender agrees to accept less than the total balance owed as long as the house is sold at fair market value. The homeowner will not be held liable for the remaining balance.

• With an assumption, a qualified buyer can assume your mortgage thus allowing you to essentially walk away.

• With a deed-in-lieu of foreclosure, you hand the deed over to your lender rather than go through the foreclosure process. This should be your last resort, as the credit impact is worse than any of the other options, but still is not as negative as a foreclosure.

A good housing counselor will be aware of all of these possibilities and maybe others. The housing counselor will also be able to help you determine what your most advantageous solution will be and help you prepare your case for the lender. To find a HUD approved agency you can contact HUD at (800) 569-4287.

The subject matter contained in our educational publications is for informational purposes only. We suggest that you consult your financial or other advisors when planning for your specific needs or requirements.

Debt Management Credit Counseling Corp. (“DMCC”) is a 501c(3) not-for-profit charitable organization located in Deerfield Beach, Florida. DMCC provides free financial educational materials, brochures, seminars and a financial literacy program titled Debt, Money & Credit Concepts to consumers across the United States. DMCC also provides free assistance to any consumer needing a solution to their debt problems, including personal budgeting, debt repayment plans, credit restoration, student loan consolidation and mortgages. DMCC financial counselors can be reached by calling 866-285-0994, emailing debthelp@dmcconline.org, or by visiting www.dmcccorp.org.