Aside from a mortgage modification, there are several other forms of foreclosure loss mitigation that Pennsylvania residents may want to consider when facing imminent foreclosure. A homeowner should be aware all of types of options available in order to work out an arrangement to avoid foreclosure.
Repayment Plan & Forbearance Plan
Two such shorter term foreclosure loss mitigation options are a repayment plan and a forbearance plan. Each of these foreclosure loss mitigation options provide temporary relief for a borrower.
The first type of short-term foreclosure loss mitigation to consider is a repayment plan. A repayment plan allows you to cure a default by repaying your delinquent amounts over time. You will pay a portion of your overdue amount along with your regular monthly mortgage payment over a set repayment period. In turn, at the end of the period, you will become current on your monthly mortgage payments and resume paying your normal monthly payments.
The typical time frame for a repayment plan is over a 3 to 9-month period. In general, the financial difficulties of homeowners must be temporary and mostly resolved at the time of the repayment plan. Because an excess payment is being made over a set period, homeowners must have excess income to be able to afford the monthly payments. As such, repayment plans are generally not offered for longer periods of time due to the difficulty of making higher than normal monthly payments.
A servicer can at times approve a repayment plan without having to get approval from the lender. However, it is important to highlight again that a borrower must be able to account for a higher monthly payment in addition to his or her other monthly expense (utilities, etc.) after recovery from temporary hardship. Otherwise, this option may not be feasible for the homeowner.
A forbearance agreement is a form of foreclosure loss mitigation that allows for reduced payments or no payment for a specified amount of time. During the forbearance, a servicer, on behalf of the lender, will not initiate foreclosure proceedings.
Like repayment plans, a forbearance is typically for a 3 to 9-month or even a year period. It is for homeowners who currently cannot make payments but will be able to catch up sooner rather than later. At the end of the forbearance period, the homeowner must bring the loan current (including principle, interest, etc.) by:
- Paying a lump sum;
- Entering into a repayment plan as described above; or
- Entering into a loan modification with the unpaid amounts added to the modification.
Note that the method of repayment varies depending on your loan and the options available under your lender. See below for further information regarding forbearance during COVID-19 and your forbearance repayment options per lenders.
A forbearance agreement, unlike a repayment plan, is an agreement in advance from the lender, or its servicer, to reduce or suspend payments. Both foreclosure loss mitigation options eventually require the borrower to repay the extra amounts and bring the loan current.
Forbearance During COVID-19
Due to the ongoing COVID-19 pandemic, additional foreclosure loss mitigation relief measures have been put in place for federally (FHA, VA, USDA Rural Housing) or Government Sponsored Entity-backed (GSE – being Fannie Mae and Freddie Mac) mortgages:
- Under the CARES act via COVID-19, a lender, beginning on March 18, 2020 and ending on August 31, 2020, may not foreclose on a federal or GSE-backed loan.
- Further, if you continue to face financial hardship from COVID-19, you may request a forbearance extension for another 180 days.
- Under a federal or GSE-backed loan, you also do not have pay back the full suspended amount in one lump sum (See Fannie Mae and Freddie Mac statements on this issue).
- Additional information on the impacts of COVID-19 related to these loans and forbearance repayment can be found here.
For loans not federally or GSE-backed, you can check with your lender to see what forbearance repayment options may be available. A guide to finding out who owns your loan can be found here.
Short Sale & Deed in Lieu of Foreclosure
Some foreclosure loss mitigation remedies, such as a mortgage modification or a repayment plan, involve a continued effort to work with your mortgage lender, or its servicer.
However, if you are not looking to restructure or refinance payments on your current residence but want to avoid the foreclosure process, two such foreclosure loss mitigation remedies are short sales and deeds in lieu of foreclosure.
What is a Short Sale?
A short sale is foreclosure loss mitigation option that is essentially an agreement between the mortgage holder and the borrower to allow property to be sold through a realtor or third party rather than through foreclosure. Often, the sale of the property will be for less than the total debt remaining on the mortgage. The proceeds of the sale go to the bank.
A short sale is a voluntary process that requires lender approval, as opposed to a foreclosure which is involuntary. During a foreclosure, a bank or lender legally seizes your property and then becomes the owner. To get lender approval, the homeowner must reach out to its servicer for an application and offer various pieces of financial information. Such information may include, but is not limited to, bank statements, an affidavit of hardship, and proof of income.
Short sale approval by lenders vary on their outlook of profits and losses regarding the property. A short sale may help the mortgage holder avoid potential foreclosure losses. However, banks may take considerable time in deciding whether to consider a short sale and may decide they could gain a better profit foreclosing on the property. There is no right on the part of the lender to agree to a short sale. Therefore, you should consider the lender’s willingness to participate in a short sale before considering it to be your best option.
Short Sale Considerations
One benefit of a short sale over a foreclosure is that you won’t have a foreclosure notation appear on your credit history or homeowner’s credit report. This does not mean that a short sale will not affect you credit history overall, because the sale will have a negative impact on it. However, a short sale can give you comfort if you are concerned about a foreclosure appearing on your credit history.
As discussed above, a short sale is also a voluntary process. You have the right to initiate the process. In addition, you can have some control and involvement in your home-selling process, albeit with your lender approval.
Another important short sale consideration is a deficiency judgment. When you sell your home by a short sale for less than the amount of the remaining mortgage, the difference between the selling price and the total debt is labeled a deficiency.
In Pennsylvania, a bank or lender may obtain a deficiency judgment within six months of the execution of a sheriff’s deed (42 Pa.C.S. § 5522). Therefore, a short sale may not be a viable option if you cannot come to an agreement with your lender to waive any deficiency. Further, even if you can come to an agreement to cancel a deficiency you could also face negative tax consequences (for further information on mortgage foreclosure and tax relief click here).
One final consideration is whether your property is affected by multiple lien or mortgage holders. Even if short sale proceeds cover your entire debt on a first mortgage it may not cover your debts owed to the second mortgage holder. In turn, you also need to acquire short sale approval from the subordinate mortgage holders as well.&
Deed in Lieu of Foreclosure
What is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a voluntary transfer of title to property over to the bank or lender. Once title is transferred over, the bank then releases the borrower from the remaining mortgage obligation. Like a short sale, a deed in lieu is a voluntary process that requires lender acceptance.
A deed in lieu is often viewed as one of the last options of foreclosure loss mitigation to consumers. Banks may require you to try to sell your home before it agrees to a deed in lieu in foreclosure. However, banks may consider a deed in lieu to avoid foreclosure issues and expenses. Eligibility factors vary on how delinquent the borrower is on the mortgage. Further, various financial documentation similar to short sale requirements are needed along with an application for a deed in lieu transfer.
Also, banks are unwilling to agree to a deed in lieu if there are junior lien holders on the property. A bank or lender will not be able to obtain clear title and will have to go through the expense of dealing with secondary mortgage holders on its own.&
Deed in Lieu Considerations
As with a short sale, there are a few things to consider when deciding to agree to a deed in lieu of foreclosure. A deed in lieu saves you the avoidance and expense of having to abide by mortgage enforcement or other related obligations. In addition, it saves you from the foreclosure process.
When negotiating for a deed in lieu of foreclosure, the borrower should try to obtain some sort of consideration for the deed such as a release of a deficiency judgment (keep in mind the potential negative tax consequences as described above) or additional time to vacate the property.
Further, a deed in lieu may not be advantageous if the homeowner has a lot of equity in the property. This higher the equity in a property, the more a homeowner is likely receive from a sale of the property in which a gain could be realized to pay off the debt and other expenses. Therefore, a voluntary transfer of property to the lender may be a missed opportunity to capitalize on the high equity value of the home.
Quality Legal Help Is Just A Click or Call Away
In conclusion, when considering foreclosure loss mitigation options such as a repayment plan, forbearance plan, short sale or deed in lieu of foreclosure as possible foreclosure loss mitigation strategies, consider talking over your options with an attorney. We at the J P Ward are ready to help with any and all of your mortgage and foreclosure concerns. Reach out today by filling out this contact form or by calling 877-259-WARD. Our talented attorneys look forward to helping you win your next fight.