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Foreclosure is the legal process banks and other mortgage lenders use to recoup their losses when a borrower stops making payments on their mortgage loan.
When a borrower uses a mortgage to purchase a property, they agree to make monthly payments to their lender until they’ve paid back the home. If a borrower is no longer able to make their payments on the loan, often due to financial hardship such as a job loss, the lender will try to earn back some or all of what they’re still owed by taking ownership of the home and selling it.
When a home is foreclosed on, the homeowner is evicted from the property and the foreclosure is recorded on their credit report, severely impacting their credit score
Work It Out With Your Lender
Your lender may be willing to work out a repayment plan to get your past-due loan back on track, provided you won’t have trouble continuing to make payments going forward. As part of this repayment plan, the lender will take the amount you owe in missed payments and add increments of it to your regular monthly payments, allowing you to pay back what you owe over a specified time period.
As you work with your lender to create a new payment plan, be sure to honestly evaluate what you can afford to pay back each month and don’t agree to pay more than what you know your budget can handle. Ask about other mortgage relief options. Depending on the situation, your lender may offer one of the options below.
As you may have guessed, a loan modification modifies the terms of your current loan. If you aren’t eligible to refinance, a loan modification can work similarly in helping to make your monthly payments more affordable, allowing you to stay current on the loan and remain in your home.
A common type of loan modification is extending the length of the loan term so that you have more time to pay off the loan, lowering your monthly payments. This may or may not be used in combination with lowering your rate.
Mortgage forbearance allows borrowers who are experiencing temporary financial struggles to put a hold on their monthly mortgage payments for a certain period of time.
During the forbearance period, the loan servicer expects that you’ll use that time to get back on your feet and prepare to continue making your regular monthly payments, in addition to paying back what you accrued while you were in forbearance, at the end of the specified period of time.
The key thing to note about forbearance is that you’ll owe the amount that was suspended at the end of the period. So, if you were in forbearance for 5 months, at the end of it you’ll need to pay back 5 months’ worth of mortgage payments. This can generally be done either as a lump sum or as part of a repayment plan.
If you aren’t eligible for any payment restructuring options that would allow you to stay in your home, your remaining options to avoid foreclosure will require you to leave your home. One of these options is what’s known as a short sale.
In a short sale, you sell your real estate for less than what you owe on it. The proceeds of the sale are paid to your lender, who then will typically forgive part or all of the remaining balance. You’ll need to get approval from your lender before you can pursue this option, as they’ll have to agree to accept less than what you owe on your loan.
Sometimes, to avoid foreclosure, a mortgage company will accept what’s called a deed in lieu of foreclosure, which is where you voluntarily transfer ownership of your home to your lender and, in exchange, are released from your mortgage obligation. This allows you to avoid an official foreclosure proceeding.
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