The Three Most-Used Methods of Resolving a Foreclosure
by: Dave Dinkel

While there are numerous ways to stop foreclosures, three are used most frequently. They are: loan reinstatement, forbearance agreement, and loan modification.

 1Loan reinstatement is where a lender has started the foreclosure process and the homeowner finds a way to pay back or "reinstate" the entire deficiency owed. The deficiency amount includes back loan principal and interest payments, accelerated interest costs, attorney's fees, assorted processing and collection expenses, and late penalty charges. This technique requires the maximum amount of money all at once. Ironically, lenders recently indicated that pre-payment penalties may be included into final judgments in the near future.

When the homeowner's reason for the delinquency is resolved, he or she usually asks the lender to take partial payments because he or she can't get the entire deficiency amount together. However, the lender will not accept partial payments and the foreclosure will proceed if the full reinstatement amount isn't paid. The reason for this is simple, the lender knows that the homeowner's chance of getting out of, and staying out of foreclosure is less than 1 in 8. So the lender does not want to delay the inevitable, the loss of the home to foreclosure.

2A forbearance agreement between the lender and the homeowner stipulates that the homeowner must make additional monthly payments for a specific period to make up the reinstatement amount that he couldn't pay in full. As simple as it sounds, it may be unaffordable for the homeowner who could barely afford the original loan payment. The lender will usually ask that the homeowner pay the reinstatement amount over a three or six month period. If the monthly loan payment was $2,000 per month and he was 3 months in arrears, the new monthly payment for a three month period would be at least $2,000 + $6,000/3 = $4,000 per month. For a six month repayment schedule the new monthly payment would be $2,000 + $6,000/6 = $3,000 per month. In some instances the lender may ask for an additional cash payment before they will start the increased monthly payments. After the 3 or 6 months, the loan payments revert to the original amount or $2,000 in the above example. The foreclosure does not stop with the signing of the forbearance agreement but simply is put on hold until the homeowner completes making all the increased payments.

When speaking to a lender, try for 12 months and encourage the homeowner not to accept less than 9 months unless he or she can truly afford it. Also ask the lender to review the borrower's financial statement, which they should readily send and remember that the lender has already pulled the borrower's credit report and knows where they work, possibly how much they make, how many other monthly payments they have, and other information that is available in the public records. The lender will have also done a price analysis on the home and probably had a Broker's Price Opinion (BPO) completed. Essentially they know what answers the borrower should be giving them, so be forewarned. This method of reinstatement takes as much money as the loan reinstatement except it is spread over 3 - 6 months or, hopefully, more.

3Loan modification was the most common method of foreclosure resolution for decades. It involved the lender issuing a new loan agreement where the deficiency amount was added to the loan balance and paid in identical monthly payments but for many more months, at the end of the loan. The monthly payments remained the same and if the home was sold, the balance of the reinstatement amount was paid from the proceeds of the sale. This method of resolution requires no up-front cash and the same monthly payment as before the foreclosure.

Another type of loan modification was to very slightly increase the monthly payments over the remaining term of the loan. So the homeowner has a choice of either extended but identical payments (as above), or slightly higher payments for the original term of the loan. Either option repaid the lender his money back plus interest. It was an affordable win-win for the lender and the homeowner, but is seldom offered anymore unless the lender knows the property is not worth taking back by foreclosure and he hasn't sold the loan into a mortgage pool.

Loan modification programs are usually not available unless there is a hardship involved such as a job loss, death or illness. However, it is worth asking the lender about it if the borrower is in foreclosure because the current market conditions and massive loan defaults have put pressure on lenders to be more cooperative with homeowners. The best option is to talk to the lender as early as possible so that the homeowner has time to resolve his or her problem.

 About The Author - Dave Dinkel is manages the website http://www.StopMyForeclosureMess.com and is the author of "32 Ways to Quickly Stop Foreclosure. He has helped thousands of foreclosure victims for nearly 33 years. Visit http://www.StopMyForeclosureMess.com for more solutions.

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