How to Deal With Your Lender When Facing Foreclosure
In the foreclosure world, "workout" has nothing to do with the elliptical trainer. It's about cutting a deal with your lender to stop the foreclosure process.
Why would an impersonal institution — a mortgage bank — want to compromise with a homeowner who is behind on his payments? Well, some banks have more of a “compassionate personality” than others, but the bottom line is that it costs a bank up to $80,000 to foreclose on a home! So it's worth it for them to work out a plan with you to stay in your house.
What is a Workout?
A workout is a compromise between a lender and a homeowner who is in default on their loan or anticipates that they will soon default. A workout may involve temporarily or permanently modifying the terms of the loan to make the mortgage more affordable or the default more “fixable” to the borrower.
What Workout Alternatives are Available to a Homeowner?
Lenders are amenable to all sorts of workout arrangements that can help a homeowner get back on track. Mortgage lenders can agree to:
- “Fix” or keep constant an interest rate or payment that is about to start adjusting.
- Lengthen an introductory “teaser” interest rate or payment.
- Grant a temporary forbearance that allows the borrower to stop making payments for up to six months.
- Defer some payments to the end of the loan, adding several months to the loan term.
- Add a large lump sum of back mortgage payments owed by a buyer into the total loan balance, so it can be paid in small installments over the entire life of the loan.
- Modify the length or interest rate of the mortgage loan, reducing the monthly payment amount.
- Waive legal fees and penalties that a buyer has incurred.
- Allow the owner to sell the home for less than is owed on it, effectively forgiving part of the mortgage balance.
- Allow the owner to transfer the home to a buyer who assumes the mortgage, even if the mortgage was non assumable.
- Agree to take a deed-in-lieu of foreclosure, which lets the owner voluntarily give the property back to the lender, rather than going through the entire foreclosure process.
A short sale occurs when a property is sold for less than what is owed on the mortgage with the lender's approval. Learn the advantages and disadvantages of this type of transaction for the seller and the buyer.
How Can You Max Out Your Chances of Working It Out?
- Explain your financial hardship and why it is/was temporary.
If you lost a job, explain why and give details as to why you believe you will be re-employed soon. If your mortgage rate and payment are adjusting, explain that and show that you made your payments on time consistently before the adjustment.
- Demonstrate that you have tried to improve your situation.
Provide proof that you have been job hunting, have reduced your monthly expenses or have taken on a second job or a roommate to boost your monthly income.
- Make a specific proposal or specific alternative proposals.
Ask for what you want in verbal and written requests. Call your lender and speak to a representative in the workout or loss mitigation department. Have a discussion with them about what you are considering requesting, and then issue your request(s) in writing. For example, if you currently have a 15-year fully adjustable mortgage with a current 7.25 percent interest rate, you might request that the lender extend the term of your loan to 30 years, change the interest rate from adjustable to fixed, and drop the rate for a lower monthly payment. Consider providing several alternatives which would work for you if the lender cannot or will not agree to your first proposal.
- Demonstrate that you are financially able to keep your end of the bargain.
In the former example, show that you now have or soon will have the income required to make the payment you are requesting.
- Make your request ASAP.
As soon as you believe you might be in financial trouble and unable to make your payments, call your lender. While it’s true that some lenders will want to see you deplete your savings before they buy your hardship story, many prefer to do workouts with people who haven’t yet fallen behind; they believe responsible borrowers are more likely to live up to their end of the workout bargain.
- Make a show of good faith.
If you are significantly behind on your mortgage, you might need to beg, borrow or steal (well, don’t really steal!) to come up with some lump sum as a show of your good faith and commitment to keeping your home. Try to negotiate some payment greater than a month’s mortgage payment, but less than the total amount you are behind as your “down payment” on your workout arrangement. Then, pay it — exactly when you say you will. If you are late making this payment, your lender will lose all confidence that you will comply with the terms of the workout.
Ask How the Agreement Will Affect Your Credit Score
When negotiating a workout with your lender and before you agree to any compromise, ask the representative: “How will this appear on my credit report?” Understand the credit implications of your compromise before you agree to it. If the compromise will be reported as a derogatory item, try to negotiate the manner in which your lender will report the arrangement to the credit bureaus. Your goal is to have it reported as “Pays as Agreed,” but if you don’t get the lender's agreement to do that before you agree to the compromise, you never will.
While a mortgage workout is less physical than your gym workout, it can be equally advantageous to your lifestyle. So stack the decks in your favor before you make that call, and good luck!