Alternatives to Foreclosure
Foreclosure is not inevitable when you fall behind on your mortgage payments. There are options. But, you need to discuss these options with your lender (the company to which you make your mortgage payments) to determine the best solution for your situation. Remember: the earlier you contact your lender, the more options you will have to avoid foreclosure.
Options to Keep You in Your Home
Your lender will work with you to determine if you are eligible for any of the following workout options. Keep in mind that your lender wants to help you; they do not want your home.
If you have an adjustable-rate mortgage that is adjusting or want to secure a lower interest rate than your current mortgage, refinancing may be able to reduce your monthly payments to a more sustainable level. If you have not missed any mortgage payments, refinancing can completely replace your current mortgage loan and provide you with new terms and a new monthly payment.
Refinancing may make sense if you:
Home Affordable Refinance Program
If you are unable to qualify for a mortgage refinance, you may be able to refinance through the Home Affordable Refinance Program (HARP), part of the federal Making Home Affordable Program.
HARP may make sense if you:
- Have a loan that is owned by Freddie Mac or Fannie Mae. Visit our Loan Look-up tool to see if we own your loan.
- Have little or no equity in the home.
- Have the financial ability to afford the new payments.
If your loan is owned by Freddie Mac, learn more about our implementation of HARP.
If you are facing a short-term financial hardship and need temporary assistance with your mortgage, your lender may offer you a "forbearance." With this option, your lender is temporarily reducing or suspending your mortgage payments for up to six months while you get back on your feet.
Forbearance may make sense if you:
- Are facing a short-term financial hardship.
- Think you may fall behind on your mortgage payments, or have already missed one or two payments.
Unemployment is a reality that many homeowners currently face. To provide you with a greater measure of security and more time to find new employment, your lender may be able to provide you with short-term unemployment forbearance (6 months) and, if necessary, extended unemployment forbearance for up to an additional 6 months if you are unemployed.
Unemployment Forbearance may make sense if you:
- Have a loan that is owned by Freddie Mac. Visit our Loan Look-up tool to see if we own your loan.
- Are facing financial hardship due to unemployment.
- Are looking for assistance with the mortgage for your primary residence.
If you are unemployed and were or currently are in an existing short-term forbearance plan, you can also be evaluated for an extended unemployment forbearance under this policy.
With a reinstatement, you may be able to make your loan current and avoid foreclosure if you have the funds to repay the missed payments on your mortgage and any associated fees and late charges (typically a lump sum payment on a specific date).
A reinstatement may make sense if you:
- Are recovering from a short-term financial hardship.
- Are behind on your mortgage and have received a notice of default.
- Can demonstrate to your lender that you can repay your debts and afford your monthly mortgage payment.
Be aware that there may be late fees and other costs associated with a reinstatement plan.
Reinstatement is often combined with forbearance when you can show that funds from a bonus, tax refund, new employment or other source will become available at a specific time in the future.
4. Repayment Plan
If you are a few months behind on your mortgage due to a short-term financial setback, but are now financially secure, you may be eligible for a repayment plan. This option will enable you to make up your missed payments, and late fees, over a fixed amount of time by combining a portion of what is past due with your regular monthly payment. By the end of the repayment period you will have paid back the amount of your mortgage that was delinquent.
A repayment plan may make sense if you:
- Have recovered from a short-term financial hardship that caused you to miss a few mortgage payments and receive a notice of default.
- Can demonstrate to your lender that you have the funds to repay past-due amounts – along with any associated fees and late charges – and can afford your mortgage payments.
Repayment plans are often combined with forbearance when you can show that funds from a bonus, tax refund, new employment or other source will become available at a specific time in the future.
For homeowners who are several months behind on their mortgage – or expect to fall behind soon – a loan modification of the mortgage terms may provide a solution. With a loan modification, you and your mortgage company will have a written agreement that changes one or more of the original terms of your note (such as the interest rate or duration of loan) to make your payments more affordable and sustainable.
A modification may make sense if you:
If you're behind in your mortgage payments, in the foreclosure process, or current on your payments but are about to default due to a recently experienced hardship, you may be able to modify your loan to a lower rate through the Home Affordable Modification Program (HAMP), part of the federal Making Home Affordable Program. This program is available through December 31, 2013.
HAMP may make sense if you:
- Have a loan that is owned by Freddie Mac, Fannie Mae or a participating lender. Visit our Loan Look-up tool to see if we own your loan.
- Took out your mortgage on or before January 1, 2009.
- Currently live in the property as your primary residence.
- Do not qualify for the federal Home Affordable Refinance Program (HARP).
- Are behind on your mortgage, or you are current but will be unable to afford your mortgage payments because of a documentable financial hardship.
- Spend more than 31 percent of your pre-tax income on your mortgage payment (including principal, interest, taxes, insurance and homeowner's association dues).
Options to Exit Gracefully from Your Home
If homeownership is no longer affordable and you do not qualify for a modification or similar alternative, there are options available to help you "exit gracefully" and avoid the financial and emotional impacts of foreclosure:
1. Short Sale
A short sale occurs when your property is sold at a price lower than the amount you owe on the mortgage, and your lender agrees to the "short" payoff. A short sale becomes an option if you are behind on your mortgage payments, you want or need to leave the property and do not have the funds to pay the difference between the net proceeds from the sale of your home and the mortgage. For delinquent homeowners and lenders, short sales provide a way to avoid many of the costly impacts of foreclosure.
A short sale may make sense if you:
- Do not qualify for any options to keep your home, including HAMP, forbearance and reinstatement.
- Need to move in order to keep or obtain employment.
- Don't think you can sell your home at a price that would cover your loan amount.
If your mortgage is owned by Freddie Mac, learn more about our streamlined short sale transaction.
With a deed-in-lieu, your lender may accept the voluntary transfer of the title of your home back to them in exchange for cancellation of your mortgage debt. This approach may have tax implications for you, and it may not be possible if there are other liens against your home.
A deed-in-lieu may make sense if you:
- Do not qualify for any options to keep your home, including HAMP, a short sale, forbearance and reinstatement.
- Are behind on your mortgage and have received a notice of default.
- Have recently filed for bankruptcy protection.
- Owe more on your loan than the home is worth.
- Have tried, unsuccessfully, to sell your home at a price that would cover your loan amount.
- Have no other liens or encumbrances on the property (such as a second mortgage, tax lien or homeowner's association lien) or the other lien holders are willing to cooperate in the short sale.
If your mortgage is owned by Freddie Mac, learn more about our streamlined and simplified deed-in-lieu option.
Be aware that all workout options affect your credit rating and some affect it more than others. You should discuss all potential impacts with your lender. You may also visit www.myfico.com for more information about your credit and how alternatives to foreclosure may affect it.
Don't Give Up!
It is important you understand what foreclosure means and why it is so critical to get help early to avoid it. The impacts of foreclosure are significant – including potential loss of equity in your home and the negative hit to your credit score. The emotional impacts are considerable as well – for you and your family.
For these reasons and more, be sure that you and your lender explore all options to foreclosure and don't give up.
Tools & Resources
- CreditSmart® Online Training
- Get the Facts on Foreclosure
- Working with Your Lender
- Find a HARP Lender
- Avoiding Foreclosure
- Getting Back on Track After Foreclosure
Steps to Get Started with HARP
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