Preforeclosure is the last opportunity borrowers have to cure mortgage arrears or work out a payment plan with their lender to avoid foreclosure. This phase takes place once lenders send out a Notice of Default, which normally occurs when borrowers are 60 days delinquent with loan payments.
Once mortgagors enter into preforeclosure they may limit eligibility for foreclosure prevention strategies. Therefore, it is important to attempt to work out a payment plan the moment borrowers realize they will not be able to fulfill their loan obligation.
Delinquent accounts are managed by the bank's loss mitigation division. This group handles preforeclosure, foreclosure, mortgage refinance, mortgage loan modification, deferred payments, forbearance agreement, real estate short sales, and deed in lieu of foreclosure. Needless to say, most banks are overwhelmed and it can take awhile to actually speak to a loss mitigator.
The number one reason people lose their home to foreclosure is because they do not reach out to their lender. Borrowers must be proactive in attempts to save their home. This will require multiple phone calls and plenty of letter writing. It is important to retain copies of all correspondence with mortgage lenders.
Keep a log of phone calls made. Write down the name of the person the conversation took place with, the date and time, and a summary of the discussion. When possible, follow-up with an email that summarizes phone calls to ensure everyone is in agreement of the terms.
During preforeclosure, banks can agree to defer payments to allow borrowers time to become current on their loan. Or, they may agree to enter into a loan modification which can reduce interest rates or extend loan terms by rolling payments to the end of the loan. Banks can allow borrowers to refinance mortgages if they qualify for a new loan.
Borrowers facing temporary financial hardship might qualify for mortgage forbearance. Using this option, banks temporarily reduce or suspend loan payments for a few months. Once the forbearance expires, borrowers must pay the full amount of skipped payments.
Mortgage lenders can elect to submit a 'Partial Claim' through the Department of Housing and Urban Development to help borrowers in preforeclosure cure past due payments. HUD pays lenders the amount required to bring the loan current. A lien is placed against the property until the partial claim is repaid. Borrowers must sign a promissory note for the amount of advanced funds.
If borrowers cannot afford to stay in their home, banks may allow them to enter into real estate short sales. This option grants borrowers' permission to sell their property for less than the full balance owed on the mortgage note. Short sales are complex and typically take 4 to 6 months to complete.
The short sale process varies by lender, so borrowers will need to discuss this option with their lender. If the bank grants short sale approval, borrowers should consider discussing the option with a real estate lawyer to ensure it is in their best interest.
It is important to note that many banks hold borrowers financially responsible for the difference between the balance owed and the sale price. Borrowers are expected to remit deficiency amounts at the time of closing. If they cannot pay the full amount lenders can obtain a judgment which is reflected on borrowers' credit reports until fully paid.
If borrowers accept a short sale arrangement they should attempt to negotiate a 'Payment in Full' agreement. This means the bank will accept the short sale price as fulfilling the loan obligation and borrowers can walk away without owing additional funds.
Last, but not least, banks can permit borrowers to return their property using a deed in lieu of foreclosure contract. Deed in lieu is reported as foreclosure on credit reports and borrowers may be held responsible for deficiency amounts once the bank sells the property.
Before making any decision, it is best for borrowers who have entered into preforeclosure to become educated about the various options, along with the advantages and disadvantages of each. We have published extensive information about each of the options presented above in our foreclosure prevention article library.
As a real estate investor, I am currently interested in buying properties in southern California, Washington, Arizona and Nevada. If you are in preforeclosure or foreclosure and need to sell your house, fill out the requested information on our Preforeclosure form and I will contact you to discuss available options.
Published on December 16, 2010 at 02:53 AM
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