What is Mortgage Foreclosure?

When most people purchase real property, they do not have enough money to simply purchase the property outright. In order to make the purchase, they are required to borrow money from a lender. In exchange for lending the money, the lender will hold a lien against the property. If the borrower does not make the required payments, then the loan goes into default and the lender can exercise the lien against the property, in order to take legal possession of the property for the purpose of selling the property to pay off the borrower's loan. This process is called mortgage foreclosure. 

What are the Borrower's Options?

First of all, it will depend whether the borrower wants to keep the property. If he or she does not wish to do so, the property owner can sell the property himself or herself before the mortgage forecloses. The advantage to this is that he or she will not have a foreclosure judgment on his or her credit record. This can help make it easier to secure financing in the future. This option will more likely be available for borrowers who have equity in the property. By selling the property on his or her own, the borrower can then pay off the mortgage, and pocket the difference if there is equity remaining.

Another available option is for the borrower to file bankruptcy. There are two primary types of personal bankruptcies available in the United States. A Chapter 13 bankruptcy is used when the individual wishes to "reorganize" his or her debts and continue paying what is owed. Filing a Chapter 13 bankruptcy can allow a borrower to keep his or her real property. This is not the case with a Chapter 7 bankruptcy, which completely discharges any debt the borrower had accumulated under the mortgage. Of course, there are serious repercussions to filing bankruptcy, including severe damage to one's credit rating. If you are considering this option, it is very important that you speak with an experienced professional to determine if this option is best for you.

A final option is to voluntarily deed the property to your lender using what is called a "deed in lieu of foreclosure" or "deed in lieu of forfeiture". This transaction will appear on your credit rating, and may be difficult to negotiate with some lenders, depending on the laws in that state. If you wish to pursue this option, it is usually best to have a lawyer or experienced credit counselors assist you on your behalf.

If the borrower wishes to keep the property, there are a number of options available before the property goes into foreclosure. The first and best option is to deal directly with the situation. Oftentimes individuals faced with a difficult situation such as a potential foreclosure will simply ignore it and hope it will go away. It is much better to be straightforward and explain any problems to the lender as soon as possible. By doing this, the lender may be able to accommodate the situation, and work with the borrower to resolve the situation in a way that is agreeable to both parties. Typically the borrower will deal with the lender's Loss Mitigation Department in cases like this.

There are a number of different options that the lender may offer depending on the situation. To determine these options, it will usually be necessary for the borrower to provided detailed information about his or her economic situation. Again, the exact options available will depend on the laws of the state, as well as the policies of the lender. There are, however, certain commonly available options, including forbearance, refinancing, mortgage modification, deferral of principal, and a temporary indulgence.

A temporary indulgence occurs when the lender agrees to suspend payments for a certain period of time, with the agreement that the suspended payments will be brought up to date when the temporary indulgence period is over. Typically, the borrower will need to demonstrate that there is a temporary problem making it difficult to pay the mortgage, and that this problem will be resolved in the near future. Two examples of this would be if the borrower had sold another property and was waiting to receive the proceeds from the sale, or if the borrower was waiting to receive an insurance settlement.

Another option is forbearance, where the lender agrees to allow the borrower to make reduced payments or no payments for a certain period of time. Such an agreement can be difficult to negotiate unless the borrower has an excellent track record with the lender. If the borrower does not abide by the terms of the forbearance, a foreclosure proceeding will likely be initiated. A similar option is deferral of principal. This means that the borrower agrees to pay the interest only for a certain period of time, and then making the normal monthly payments.

Mortgage modification and refinancing are two other options available to a lender who finds himself or herself in a financial bind. Mortgage modification means that the borrower renegotiates the terms of the mortgage with the current lender. This can include changing the interest rate, adding any arrearage to the principal, and extending the length of the mortgage. Refinancing means that the borrower obtains a new mortgage with a different lender. It is usually best to avoid this option, because most of the alternatives available to a borrower in distress will only make the situation worse.

If the property has already gone into foreclosure, there are still options available. It may still be possible to work out an agreement with the lender, such as those described above. If this is not possible, the borrower may consider filing a Chapter 13 Reorganization bankruptcy. As described above, this will allow the borrower to work out a payment plan with the lender and keep the property.

In some states, the borrower may also have the option of reinstatement. This means that the borrower brings the foreclosed mortgage current, including all overdue amounts, as well as fees and costs. In states where redemption is available, the borrower is usually limited in how often he or she can take advantage of this option. Again, redemption is only available in some states, and the law varies among those states that offer redemption. It is important to consult an experience professional if you are unsure about this option.

A final option for a borrower in foreclosure who wishes to keep the property is for him or her to redeem the mortgage. This means that the borrower pays off the entire principal balance of the mortgage, along with the accumulated interest, fees and costs. Obviously, it will be very difficult for many borrowers to take advantage of this option.