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And if none of these alternatives will work for your situation, you might consider another way to avoid a foreclosure, like by completing a short sale or deed in lieu of foreclosure or filing for bankruptcy.
A "forbearance agreement" provides short-term relief for mortgage borrowers. With a forbearance, the lender agrees to reduce or suspend mortgage payments for a while. Unlike a repayment plan, the lender usually agrees in advance for you to skip payments or pay lower amounts.
During the forbearance period, the servicer (on behalf of the lender) won't initiate a foreclosure. In exchange, the borrower has to resume making payments at the end of the forbearance and get current on the missed amounts, including principal, interest, taxes, and insurance.
To bring the loan current, you can usually:
If you can't make additional payments to get caught up after a forbearance plan, you might be able to pay the missed mortgage payments at the end of your loan term without changing your current monthly payment. So, your payment of principal and interest stays the same. And the deferred amounts won't accrue interest. You must pay the deferred amounts when the loan ends, sell the home, or transfer, refinance, or otherwise pay off the loan.
The amount you can defer to the end of the loan might be limited. Some lenders limit the deferral option to around two payments.
Payment Deferral Option After a COVID-19 Forbearance
An amended federal law allows loan servicers to offer a payment deferral option to homeowners who finish a COVID-19 forbearance without requiring them to complete a loss mitigation application. If you accept the servicer's offer, you pay the skipped payments at the end of the loan. In return, the servicer gets out of having to comply with some federal mortgage servicing requirements.
This kind of payment deferral plan isn't limited to just forbearances for federally backed mortgage loans. All borrowers with COVID-related forbearances, even those who don't have federally backed mortgage loans, are potentially eligible.
The terms of a forbearance agreement, including how long one will last, vary from lender to lender. In some cases, the lender might be able to extend the forbearance if your hardship isn't resolved by the end of the forbearance period.
A "repayment plan" is an agreement to repay delinquent mortgage amounts over time.
Here's how a repayment plan works:
Example. Say you're three months behind on your payments of $1,500 a month. So, you're $4,500 behind. For this example, let's assume the servicer doesn't add any late fees or costs to the account. The lender might allow you to pay $750 extra each month to get current on the loan over the next six months. So, you'll pay $2,250 each month for six months. At the end of the repayment period, you resume making regular monthly payments of $1,500.
The length of a repayment plan varies depending on the past-due amount and how much you can afford to pay each month, among other things. A three- to six-month repayment period is typical, although it could be longer.
A "loan modification" is a permanent restructuring of the home loan. One or more terms are changed to provide the borrower with a (hopefully) more affordable payment.
With a modification, the lender might agree to do one or more of the following to lower your monthly mortgage payment:
Delinquent payments and other overdue amounts, such as late fees, are usually added to the outstanding principal balance as part of a modification.
You'll also have to meet all lender guidelines, which can be extensive and complicated.
Many different loan modification programs are available, including proprietary (in-house) loan modifications and Fannie Mae and Freddie Mac Flex Modifications. Other special modification programs are available for certain kinds of loans, like FHA-insured home loans.
If a repayment plan, forbearance, or loan modification won't work in your situation, you might consider using a short sale, deed in lieu of foreclosure, or another way, like bankruptcy, to avoid a foreclosure.
What Is the Automatic Stay in Bankruptcy?
As soon as you file bankruptcy, the automatic stay prevents creditors, including mortgage lenders, from proceeding with collection actions, including foreclosure. While the automatic stay will immediately stop a foreclosure, the lender can file a motion with the bankruptcy court, asking to lift the stay. If the court grants the motion, the lender can proceed with foreclosure.
If you want to keep your home, you might try for a forbearance, repayment plan, or loan modification. Or filing for Chapter 13 bankruptcy might provide a way for you to retain the property. However, if you're ready to give up the property and want to avoid a foreclosure, you might decide to complete a short sale or deed in lieu of foreclosure.
If a temporary hardship causes you to fall behind in your mortgage payments, a forbearance agreement might stop a foreclosure until your situation improves.
If you've missed some of your mortgage payments because of a temporary hardship—but now your finances are back in order—a repayment plan might provide a good way for you to prevent a foreclosure.
Suppose you're currently unable to afford your mortgage payment due to a change in circumstances. But you could make a modified (lower) payment going forward. In that case, getting a mortgage modification might help you avoid a foreclosure.
One benefit to a short sale is that you won't have a foreclosure on your credit history. But a short sale damages your credit about as much as a foreclosure. For some people, though, not having the mark of a foreclosure on their record is worth it. Another upside is that some lenders offer relocation assistance to help homeowners find new housing after a short sale.
On the downside, while many states have enacted legislation prohibiting a deficiency judgment following a foreclosure, most states don't have a similar law preventing a deficiency judgment after a short sale. So, unless the lender waives its right to the deficiency, it might sue you for a deficiency judgment after a short sale.
If you won't face a deficiency judgment after a foreclosure, but you could after a short sale (or deed in lieu of foreclosure, see below), it might be better to let a foreclosure happen.
Potential Tax Consequences of a Short Sale or Deed in Lieu of Foreclosure
If the lender forgives some or all of the deficiency and issues you an IRS Form 1099-C, you might have to include the forgiven debt as income on your tax return and pay taxes on it.
Like a short sale, if you do a deed in lieu of foreclosure, you won't have a foreclosure in your credit file. But, again, foreclosures, short sales, and deeds in lieu of foreclosure are all similarly bad for your credit. If the lender waives the deficiency after a short sale or deed in lieu, your credit scores might not take as bad of a hit.
Also, like with a short sale, you might qualify for relocation assistance after a deed in lieu of foreclosure. Another upside is that unlike with a short sale, you won't have to deal with the process of selling your home.
On the downside, the lender won't approve a deed in lieu of foreclosure if your home has multiple liens on it. (However, completing a short sale with multiple lienholders might be possible.) And your lender might sue you for a deficiency judgment if it doesn't waive its right to get the difference between what you owe on the mortgage loan and the property's fair market value.
Also, if you have a lot of equity in the property, a deed in lieu usually isn't a good way to go. You'd probably be better off by selling the home and paying off the debt.
A Chapter 7 bankruptcy is quick, and filers can eliminate debts without repaying anything to creditors. With a Chapter 13 bankruptcy, filers pay their discretionary income to creditors in a three- to five-year repayment plan and get debt relief in exchange.
Filing for Chapter 13 bankruptcy. If your main goal is to keep your home by filing for bankruptcy, you might want to consider filing for Chapter 13 bankruptcy. Under a Chapter 13 bankruptcy plan, which lasts three to five years, you'll pay your discretionary income to their creditors.
In a Chapter 13 bankruptcy, you can get caught up on the overdue mortgage payments over time through the repayment plan. And any unsecured debt, like credit card debt, that remains at the end of your plan is discharged (eliminated), unless it is one of the types of debt that survives bankruptcy, like child support.
Your home in a Chapter 7 bankruptcy. To keep your home in a Chapter 7 bankruptcy, you must be current on payments and protect all your home equity with a bankruptcy exemption. If you're behind in payments, you can delay the foreclosure process with a Chapter 7 bankruptcy. But the lender will probably ask for, and receive, relief from the automatic stay.
So, it probably doesn't make sense to file a Chapter 7 bankruptcy just to delay a foreclosure. But if you have a lot of other debts that would be discharged (eliminated) in a bankruptcy, this option might be suitable.
What option to prevent a foreclosure is appropriate for you depends on your specific circumstances. Consider talking to a foreclosure attorney to get more information about different ways to avoid a foreclosure and which one might be best for your situation.
If you can't afford a lawyer, a HUD-approved housing counselor can help you understand the different alternatives to foreclosure.
Also, consider talking to a bankruptcy attorney if you want to learn more about whether filing for bankruptcy is appropriate in your situation.