Step 1: The Borrower Misses Their First Payment And Subsequent Payments
Understand that simply missing a single payment by just a few days usually won’t trigger any sort of legal action by your lender. Review your loan documents to see if there is a grace period for late payments. People can be late by several days for many different reasons, which although justifiable, may not get them out of paying late fees.
Being late on your mortgage payments by 30 days and beyond is often what triggers the pre-foreclosure process. The lender will send the borrower a Notice of Default, indicating the borrower has defaulted on their loan and intends to pursue legal action. The filing of the notice of default officially starts the pre-foreclosure process. Pre-foreclosure lasts between 30 and 120 days. This is the timeframe for the borrower to work directly with the lender to resolve the issue.
If the borrower is in default, usually the Lender makes contact in the form of a “breach letter.” Within this letter, the lender may discuss options to help the borrower avoid a foreclosure proceeding. This is formally known as loss mitigation. Within loss mitigation are several options some lenders MAY offer to the borrower such as: loan reinstatement, loan modification, short sale, deed in lieu of foreclosure, and payment plans. Not all options are available in all circumstances nor is the Lender necessarily required to offer this under all circumstances.
Loan Reinstatement: Reinstating the loan simply means catching up on all of your missed payments and becoming current on your obligation. If this occurs, the foreclosure proceeding will not continue.
Loan Modification: A borrower may have the option to apply for a loan modification. This entails changing the terms of the loan such as the interest rate and/or the loan period. This can help lower the payment, potentially making it more affordable for a borrower. However, it could substantially lengthen the loan period or tack on higher interest payments to the back end of the loan.
Short Sale: A borrower can request permission from the lender to do a short sale of the property. This is when the homeowner opts to sell the property for less than what is owed on the mortgage. In some cases, the difference may be forgiven by the lender. In other cases, the borrower may be required to make arrangements with the lender to settle the outstanding debt throughout time. Only your lender can answer specific questions regarding the short sale of your property. This may have negative tax consequences resulting in the forgiveness of debt. It would be important to discuss this with a licensed CPA.
Deed in Lieu of Foreclosure: This strategy involves the homeowner voluntarily surrendering the deed of their home to their lender in exchange for not foreclosing. This option may not work if there are secondary loans on the property or judgements.
Payment Plans: A payment plan can be negotiated between the lender and borrower in an effort to catch up on late payments.