The thought of foreclosure is enough to send any homeowner into a panic. But contrary to belief, starting the foreclosure process does mean you're at a dead end. From the day you receive your Notice of Default, you always have options, and the earlier you act, the easier it is to get back on track.
The two most common ways to stop foreclosure are a short sale and a loan modification. Both have their own pros and cons, and it’s important to choose the right path based on your situation depending on if you plan to keep or sell your home. This guide shows you both options and how they can help.
Option 1: Loan modification
The main advantage of loan modification is that you get to keep your home and continue your mortgage on more comfortable terms. It works by changing your mortgage terms to lower your monthly payments, allowing you to afford making your monthly payments again. This option is best for homeowners who have good payment habits but fell behind because of unavoidable hardship.
The two most common ways to stop foreclosure are a short sale and a loan modification. Both have their own pros and cons, and it’s important to choose the right path based on your situation depending on if you plan to keep or sell your home. This guide shows you both options and how they can help.
Option 1: Loan modification
The main advantage of loan modification is that you get to keep your home and continue your mortgage on more comfortable terms. It works by changing your mortgage terms to lower your monthly payments, allowing you to afford making your monthly payments again. This option is best for homeowners who have good payment habits but fell behind because of unavoidable hardship.
How it works
In a loan modification, you work with a lawyer who will basically guide you through the application. Your loan modification attorney will start by evaluating your case and deciding whether or not a mortgage modification will work for you. It’s important to talk to a good loan modification attorney who can completely understand your situation.
Once you’re qualified, they’ll ask for a few financial documents complete your negotiation package. These usually include proof of income (pay stubs, W2 forms, etc), bank statements, and a hardship letter explaining your request and how you fell behind. They’ll go over your documents to see if there are any legal violations (RESPA and TILA) that can be used as leverage.
After that, your application is submitted and your lawyer begins negotiations. This is the main part of the loan modification process. The wait time depends on how your bank responds and whether they make a reasonable offer. Your lawyer will keep negotiating until you reach the best loan modification agreement with your lender.
Finally, a loan modification offer is sent to you for approval. The change can be an extension of your loan term, a shift from adjustable to fixed rate, a lower interest rate, or a reduction of principal. It all depends on your situation and how well your lawyer can negotiate.
How to qualify
Anyone in financial trouble can qualify for a loan modification. However, each lender has its own standards, and you may want to check with yours to see if you’re eligible. In most cases, you’ll need at least a source of income and valid proof of your hardship. Examples of acceptable hardship include job loss, illness or death in the family, and military service. You’ll need to explain this in detail in your hardship letter so that your bank can fully understand your case.
They’ll also look into your financial documents to see if you can handle your loan once it’s modified. It’s best to have at least two months’ payment saved up by the time you’re approved, and an emergency fund to cover up in case you fall behind again.
Option 2: Short sale
A short sale is when you sell your home and your bank agrees to receive the proceeds, even if it’s less than the amount owed on the loan. The drawback is that you still lose your home, and your lender can give you a tight time frame in which to find a buyer. A short sale is still damaging to your credit, but it’s easier to clean up than a foreclosure which stays on record for up to ten years.
Anyone in financial trouble can qualify for a loan modification. However, each lender has its own standards, and you may want to check with yours to see if you’re eligible. In most cases, you’ll need at least a source of income and valid proof of your hardship. Examples of acceptable hardship include job loss, illness or death in the family, and military service. You’ll need to explain this in detail in your hardship letter so that your bank can fully understand your case.
They’ll also look into your financial documents to see if you can handle your loan once it’s modified. It’s best to have at least two months’ payment saved up by the time you’re approved, and an emergency fund to cover up in case you fall behind again.
Option 2: Short sale
A short sale is when you sell your home and your bank agrees to receive the proceeds, even if it’s less than the amount owed on the loan. The drawback is that you still lose your home, and your lender can give you a tight time frame in which to find a buyer. A short sale is still damaging to your credit, but it’s easier to clean up than a foreclosure which stays on record for up to ten years.
How it works
The short sale process starts when you contact your lender and make your proposal. You may want to contact a lawyer beforehand to help you talk to your lender, and help you map out your selling plan. Once your lender has agreed to the sale, you will issue a letter authorizing them to release information about your mortgage and property to investors or potential buyers.
The details are presented in a document called a settlement statement. This includes the proposed selling price, remaining balance on the mortgage, and all associated expenses such as commissions and closing costs.
As with a loan modification, you will also need a hardship letter explaining your situation and what kind of mortgage assistance you want. Your bank will verify your claims using standard financial documents, which you will also provide. When you’ve been properly assessed, your lender will contact a third party (usually a broker) to examine your home and verify its market value.
Once you find a buyer, the short sale takes place and the proceeds go to your lender. The rest of the loan is written off, so effectively you’re getting a discount. Note that the savings can be taxable. Check with a lawyer and accountant to see if there are any liabilities.
The short sale process starts when you contact your lender and make your proposal. You may want to contact a lawyer beforehand to help you talk to your lender, and help you map out your selling plan. Once your lender has agreed to the sale, you will issue a letter authorizing them to release information about your mortgage and property to investors or potential buyers.
The details are presented in a document called a settlement statement. This includes the proposed selling price, remaining balance on the mortgage, and all associated expenses such as commissions and closing costs.
As with a loan modification, you will also need a hardship letter explaining your situation and what kind of mortgage assistance you want. Your bank will verify your claims using standard financial documents, which you will also provide. When you’ve been properly assessed, your lender will contact a third party (usually a broker) to examine your home and verify its market value.
Once you find a buyer, the short sale takes place and the proceeds go to your lender. The rest of the loan is written off, so effectively you’re getting a discount. Note that the savings can be taxable. Check with a lawyer and accountant to see if there are any liabilities.
How to qualify
The requirements for a short sale can vary from lender to lender. Most of them have to do with your type of hardship and the market value of your home. Before applying, check your local listings to see if your home’s market value has dropped. It should be worth less than the balance you owe your lender. You should also have a valid hardship that can be verified in your financial documents.
The requirements for a short sale can vary from lender to lender. Most of them have to do with your type of hardship and the market value of your home. Before applying, check your local listings to see if your home’s market value has dropped. It should be worth less than the balance you owe your lender. You should also have a valid hardship that can be verified in your financial documents.
What is a sub prime mortgage? I have an adjustable arm that will goup to $900 next month i cnt afford this please show me how to stop foreclosure without ruinng my credit or bankruptcy