Foreclosure prevention or loss mitigation programs were established by the federal government and the mortgage industry in order to help prevent home foreclosures. There are several programs available, and each lender has its own policies regarding the use of these programs. In addition, each program has its own complexities and rules that must be followed.
If any firm claims they can stop your foreclosure immediately if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your own home! Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional or e.g. a HUD approved housing counselor.
There are numerous companies and non-profit organizations offering a variety of programs; the most common programs are laid out below:
1) Loan Modification
A Loan Modification is "a permanent change in one or more of the terms of a mortgagor's loan, which allows the loan to be reinstated, and results in a payment the mortgagor can afford." For example, the interest rate can be lowered, the remaining balance re-amortized and/or the current term of the loan extended, in order to reduce the monthly payment. There are costs and fees associated with a modification. In order to qualify for a Loan Modification, all property taxes must be current, or the homeowner must be participating in an approved payment plan with his/her taxing authority.
2) Short Sale
A "short sale", also known as a "short payoff", a "pre-foreclosure sale", or a "compromise sale", is really the option of last resort, and requirements to have this occur are very stringent. Loss mitigation companies are not authorized to approve such loans - only the lender can do it. It is defined as "A sale in which a lender allows the property securing a mortgage or deed of trust loan to be sold for less than the existing loan balance, due to factors such as the borrower's financial circumstances, the property's physical condition, and local real estate market conditions." Basically, the owner sells the home for less than the mortgage balance and the lender agrees to take the proceeds. This may have tax consequences as the IRS sees the difference between the balance and the sale price as taxable income. Please consult a tax advisor. To qualify for a "short sale," you must have suffered a long term financial hardship - for example you or an immediate family member have suffered a catastrophic illness, your employer has transferred you out of the area and you're unable to sell or rent the property or you've suffered a disabling injury that precludes you from ever working again. Investment properties are generally not eligible for a short sale.
3) Repayment Plan
A large number of people have short-term financial problems, and may have no choice but to miss a payment or two on their mortgage. Once that short-term problem is over, they can go back to making their mortgage payment, but they can't come up with enough money to also pay the missed payments. This is the most common mortgage problem, and a repayment plan is the most common solution. You arrange a repayment plan with the lender whereby, in addition to your normal mortgage payment, you also pay a bit of what you owe on the missing payments, until you are caught up.
4) Special Forbearance
If you can show your lender that you will be able to pay your mortgage loan after a certain length of time, you may qualify for a special forbearance. Your lender will allow you to make reduced payments for a certain amount of time, or indeed, no payments at all. However, during this time period, interest on the loan will continue to accrue. The special forbearance is often combined with a repayment plan.
5) VA Loan Modification / Refunding
The VA Loan is a program set up by the Veterans Administration to help active duty and retired military personnel purchase homes. With a loan through the VA, the home is financed completely, so that you don't have to pay mortgage insurance, and they also set limits on the types of fees that can be charged by your lender. If you're having temporary problems, it is possible to do a Loan Modification on a VA loan. If your lender will not do a loan modification, but intends to foreclose, the VA also has an option, called "re-funding" – where they will buy your loan from your original lender, and re-amortize the loan so you can afford to make the new payments. Check http://www.homeloans.va.gov/ for details.
6) Partial Claim
If you do not qualify for a repayment plan or loan modification, you may still be able to obtain a partial claim – if your mortgage is through the Federal Housing Authority (FHA)
With a partial claim, you are taking out an interest-free second mortgage through HUD, to assist you in paying the first mortgage. FHA mortgage holders may qualify for a partial claim if their loan payments are more than 4 months, but no more than 12 months, overdue, and they have the proven financial stability to begin meeting their payments. Check http://www.hud.gov/foreclosure/ for details.
7) Deed In Lieu of Foreclosure
If you have had your home listed with a real estate agent for at least 30 days, with no success in selling it, and if it is in sellable condition, and if there are no claims or liens against it – other than your mortgage, you may be eligible for a "deed in lieu of foreclosure".
What this means is that you transfer the deed of your house to your lender, so they do not have to foreclose on the property. They obtain ownership of the property immediately, and the remainder of your debt is forgiven. Note that this program does not guarantee you can stay in your house.