General loss mitigation options
"Loss mitigation" refers to options to avoid foreclosure. Loss mitigation may mean that you keep your home. But, loss mitigation may also mean that you agreed with the mortgage company to give up your home. Working in good faith with your mortgage company is extremely important to preventing foreclosure.
Some courts have created programs to help homeowners agree with their mortgage lender. Mediation is a process to help you and the mortgage company reach an agreement about the foreclosure. Mediation is run by a neutral person called a "mediator." Mediation can be very useful to work out a loss mitigation option.
Mediation is not available in every county, and each mediation program's rules are different. You should check with the circuit court in your county to determine if mediation is available. Here are some of the counties that have mortgage foreclosure mediation programs:
- Boone County
- Grundy County
- Kane County
- Kankakee County
- Lake County
- LaSalle County
- Madison/Bond County
- McLean County
- Peoria County
- Will County
- Winnebago County
A loan modification changes the terms of your mortgage loan. The goal is to bring your loan current while also making it more affordable. Eligibility for a loan modification depends on many factors such as:
- Your income
- Who the mortgage company is
- When you got the loan
- What type of loan you have
Ask your mortgage company or a HUD-certified housing counselor about how to apply for a loan modification. You should apply for a loan modification as early as possible if you are behind on payments or in foreclosure. Be sure to keep very detailed records of what information you send the mortgage company when applying for a modification.
Bankruptcy in Foreclosure
Sometimes you can deal with your foreclosure problem by filing for bankruptcy.
Filing Chapter 7 bankruptcy will normally get rid of your liability for the mortgage loan. That does not prevent the mortgage company from taking your home if you have missed payments. A Chapter 7 bankruptcy discharge does, however, prevent or eliminate a "deficiency."
Chapter 7 bankruptcy may also avoid a lien on your home. But, some debts (like IRS debt or student loans) usually cannot be discharged in Chapter 7 bankruptcy. If your home is worth more than you owe on the mortgage loan, you may lose your home by filing Chapter 7 bankruptcy.
Learn more about Chapter 7 bankruptcy.
Chapter 13 bankruptcy is a type of repayment plan. In Chapter 13 bankruptcy, you must repay the missed mortgage payments within 60 months (5 years) while also making your current monthly mortgage payment. This option only works if you can afford it.
Learn more about Chapter 13 bankruptcy.
A repayment plan helps you get caught up on your loan over time. The mortgage company will charge extra payments per month until you are no longer behind on your payments. A mortgage company may not accept a repayment plan after a bankruptcy.
Forbearance may refer to a repayment plan. But, a forbearance is usually an agreement between you and the mortgage company where you make lower payments (or no payments) for a certain period.
During forbearance, the mortgage company should agree not to foreclose.
A forbearance plan that lowers or suspends payments is not a long-term solution. A forbearance usually means you are becoming more and more delinquent and further behind while you attempt to resolve your hardship and seek a more permanent solution, like a modification.
Reinstatement means getting caught up. To reinstate, you must pay all missed monthly payments, plus any other fees and costs.
You can only reinstate within 90 days after you receive a summons and complaint. If the court rules that you have used the right to reinstate, you do not have the right to do it again for five years.
Redemption is paying off the whole loan. You have the right to do this within seven months of getting a complaint and summons, or 3 months after the date the judgment of foreclosure is entered, whichever is later.
The time allowed for redeeming can be shortened sometimes. Most commonly, the redemption period may be reduced if the property is abandoned.
Redemption usually happens when the house is sold or when the property is refinanced.
You can refinance the loan if you have enough equity in your home. Equity is the amount of money you've already paid on your mortgage.
However, refinancing when you are in foreclosure is difficult. You may also have to pay a high-interest rate and high loan charges.
You are likely to get many offers to refinance and save the home. You should be very careful about refinancing. Homeowners often end up losing the house after paying, even more, money to refinance. Homeowners may also be the target of refinancing scams.
You can sell your home at any time before the redemption period ends.
If you sell the home for more than you owe, you will keep the profit. However, if you sell the home for an amount less than what you owe, the lender must agree. This is called a short-sale.
In a short-sale, the mortgage company may agree to take the money from the sale of your home as full payment for the loan even though you owed more money than that.
A short sale may have income tax consequences. You should work with a qualified realtor, attorney, and tax professional.
Deed-in-lieu of foreclosure
In a deed-in-lieu of (or "instead of") foreclosure, you voluntarily give your home to the mortgage company. In return, the mortgage company lets you out of liability for the mortgage loan.
If the mortgage company agrees and accepts a deed from you, you lose the house, but you should not owe any more money.
A deed-in-lieu agreement must release you from the home loan unless you agree otherwise.
Make sure to get a deed-in-lieu agreement in writing. A deed-in-lieu may have income tax consequences. You should work with a qualified attorney and tax professional.
In a consent foreclosure, the mortgage company cannot get a deficiency judgment against you. Make sure to get this written in a court order.
A consent foreclosure may have income tax consequences. A consent foreclosure may also make it harder to get another mortgage loan in the future. You should work with a qualified attorney and tax professional.
For more information, view the following video on Options for avoiding mortgage foreclosure.
Updated: January 2017