Homeowners who have failed, for one reason or another, to maintain the payment obligations of their loans, and are found in default on their loans, have a number of options available to them to stop the foreclosure process.
Bring the loan current
The best possible resolution for homeowners in default, is to reinstate the loan by bringing payments current, and paying all past due amounts.
Sell the property
A traditional sale of the property, in which the asking price covers the costs of the entire loan in default, would stop the foreclosure and eliminate the obligation of the homeowner to make monthly payments, by providing a payment in the full amount of the loan. Another option, should a conventional sale fail, is a short sale; this is the sale of the house, under agreed upon terms with all lien holders, to sell the property and settle the debts for less than the amount owed. Short sales can be difficult for properties with significant negative equity.
Refinance the property
Refinancing a property with more reasonable monthly payments and interests rates could potentially permit the homeowner to remain in the home, by paying off the current default obligation with the newly refinanced obligation.
Work with the lender
- Loan modification: Modifies the terms of the original loan to enable the homeowner to stay in the home. May adjust interest rate, principal balance, length of loan, or other terms.
- Forbearance: An agreement not to collect past due amounts for some period of time. Can be useful when the borrower fell behind due to temporary illness, or job loss, and can afford payments going forward; but can not afford to repay the past due amounts.
- Repayment Plan: Similar to a forbearance, except the past due amounts are repaid in small amounts over a period of time, rather than being delayed to a future date.
- Deed-in-lieu: Sometimes referred to as jingle mail (the sound of keys being mailed back to the lender), a deed-in-lieu is a method of simply handing ownership of the property back to the lender. Many lenders will not accept this deed, as they will then have to pay to remove other liens on the property; whereas those liens may be wiped out if they choose to foreclose.
Sue the lender
While it is often a good idea to have an attorney review loan documents for problems, and to help negotiate better loan modification terms; lawsuits are expensive and likely beyond the reach of most homeowners, unless working together in a class action suit.
Bankruptcy really only delays foreclosure. While Congress is considering allowing judges to modify loan terms, they currently cannot. As such, if the owner fundamentally can't afford to make payments, the judge will likely have to grant the lender a motion allowing them to continue the foreclosure. This option should therefore be used carefully, as it impacts your credit for 10 years, versus 7 years for a foreclosure alone.