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GOOD AND BAD ALTERNATIVES FOR HOMEOWNERS HAVING DIFFICULTIES MAKING MORTGAGE PAYMENTS:

Do Nothing - If a homeowner does nothing, they will most likely will lose their home at a foreclosure auction. This also has a major negative impact on the homeowner's credit report. The homeowner's ability to obtain future credit for homes, cars, and other purchases will be severely damaged for years. Doing nothing is the MOST common reaction and the WORST thing a homeowner can do.

Discounted payoff - In some cases the lender might be agreeable to a full payoff where they award a discount. This is often the most cost effective option for the homeowner. Instead of having to pay the full face principal on the loan and continue make interest payments, they can negotiate to pay only a portion of the outstanding balance. Obviously, the downside is that if the homeowner is having trouble making only the monthly payments, they might not have the ability to pay off the loan. However, this option is so attractive and the discount can be so substantial in some cases that it is worth getting creative to afford this option. Some possible sources are:

Withdraw money from your 401K as a hardship distribution - A homeowner is allowed to make a 401K withdrawal without penalty to avoid a foreclosure. For more information from the IRS, visit Hardship Distributions.
Credit cards and hard money lenders - In some cases it might make sense to accomplish the payoff using this option. As an example, let's say the lender is offering a 90% discount on a 16% interest loan and the homeowner's credit card APR is 18%. The payoff discount being offered is attractive so it makes sense to use a credit card for the payoff. In addition, the homeowner has now turned secured debt into unsecured debt ensuring they will not lose their home. It is not common to get such a heavy discount, but some lenders will offer them. Most mortgage lenders will not accept credit cards as a form of payment, but some credit cards offer checks that, in most cases, can be used as a regular check.

Payoff/Refinance - Completely pay off the entire loan amount plus any default amounts and fees. Typically this is accomplished by a refinance of the mortgage loan. The new loan is usually at a higher interest rate, plus there may be a prepayment penalty because of the recent default. This option is available if the home is worth more than the payoff amount of the delinquent loan and it assumes the homeowners still have reasonably good credit scores.

Reinstatement - Paying the entire past-due amount on the mortgage loan (all missed payments, plus interest, attorney fees, late fees, taxes, and other fees). This requires the lender's approval, particularly if foreclosure has actually started.

Loan Modification - Work with the mortgage lender to rearrange the conditions of the loan (add years to the loan term or increase the amount of monthly payments to repay the delinquent payments and other costs over the remaining life of the loan). This may allow the homeowner to get caught up without having to refinance the entire loan. To qualify, you must prove to the lender you have fixed the problem that caused the late payment. This requires lender approval.

Forbearance - The lender might agree to a temporary repayment plan based on the homeowner's financial situation. The lender may even be able to provide a temporary payment reduction or suspension of payments. Information will be required by the lender to show that you are able to meet the new payment plan requirements. This requires lender approval.

New Second Mortgage (Partial claim) - In some cases, the mortgage lender may give the homeowner an additional mortgage, secured by the home. All of the new loan proceeds are used to bring the 1st mortgage up to date. From that point on, the homeowner must make payments on both the original and new loans. Depending on the mortgage lender/investor, this option might be fairly easy to obtain but must be requested by the homeowner.

Deed in Lieu of Foreclosure/Quit-Claim Deed - Give the property to the lender instead of having the lender take the property by foreclosure. While less damaging than a foreclosure, this will still impact the borrower's credit score. Banks generally require that the home be well maintained, all mortgage payments and taxes be paid current, and that the home be in good general condition. This requires lender approval.

Rent the property - This option works best when the monthly rental payment is equal to the full mortgage payment. It can also work if the homeowner has the ability to cover the shortage. To use this option, the loan must be brought current. This requires lender approval.

Sale - There are two types of home sales:
If the property IS worth at least enough to pay off the mortgage debt, the homeowner may sell home without lender approval through a conventional home sale. This is the best method for protecting a homeowner's credit score, but it becomes more difficult to do as the number of missed mortgage payments increases.

If the property IS NOT worth enough to pay off the entire mortgage debt, a short sale, also known as a pre-foreclosure sale, can be negotiated with your lender by a real estate professional. This requires lender approval and may affect the homeowner's credit score.