Refinance Your Mortgage To Avoid Foreclosure: Understanding Your Options
It's theoretically possible to refinance your mortgage to avoid foreclosure by getting into a more affordable payment, but you have to do so before you enter foreclosure. Additionally, for the best chance of approval, you’ll have to do so before you’ve missed any payments. We know that this isn’t always feasible, unfortunately.
The good news is you may still have options within the different types of refinance options to work things out and stay in your home. If you think you’re in danger of missing payments on your mortgage, the key is early communication with your mortgage servicer. This may or may not be the lender that originated your loan, but because your mortgage servicer is the entity that collects your monthly payments, you’ll want to talk with them directly. The earlier you can get in communication with them, the better. If you wait too long in an attempt to avoid the problem, it can make the situation worse.
Can I Refinance While In Foreclosure?
It’s not possible to refinance while you’re in foreclosure. If you were to refinance, the best option is to be current on your payments and refinance into a more affordable payment before you’re in serious financial trouble.
In order to have the best chance of qualifying, you won’t want to have missed any payments. Mortgage lenders set limits on how many you can miss and missed payments have a negative effect on your credit score. Both of these factors can impact your ability to qualify.
Once you’ve had your home foreclosed on, there’s a waiting period of 2 – 7 years before you can get a mortgage again, depending on the loan option you’re looking for.
What Is The Difference Between Foreclosure And Default?
Foreclosure is the process by which a lender can take control of your home, sell it and evict any occupants if there’s a breach of your mortgage contract. Default is the act of breaching the mortgage contract. This most often happens when you miss a mortgage payment.
Although the terms of your mortgage contract may vary, you’re generally considered to have missed a mortgage payment when it’s 30 days or more late, if not sooner.
The best way to think of default is as a step on the way to foreclosure, but it doesn’t mean your property will automatically go into foreclosure.
What Is Preforeclosure?
Preforeclosure is the first step in foreclosure. The idea is that homeowners are given ample notice so that they can work with their servicer and take steps to stay in their home while dealing with the issues that led to the default. During this time, you should work with your servicer closely to identify what options might be available to you.
Options For Avoiding Foreclosure
Before you start packing your bags, look into all your options. Life happens and foreclosure might not be inevitable. You have options to make the refinancing process smooth and potentially save your home.
A short refinance occurs when your lender agrees to refinance your home for the value that it’s actually worth, forgiving any portion of the balance that’s more than the home is worth. Instead of referring to it as a short refinance, some lenders refer to this as a type of mortgage loan modification. We’ll have more on that in a minute.
This process is similar to a short sale. In a short sale, you work with your lender to sell your property for some amount less than what you owe to avoid foreclosure. The difference with a short refinance is that you stay in your house. We’ll have more on short sales later.
It’s important to note that like a short sale, a short refinance can hurt your credit because you’re paying an agreed-upon amount rather than the amount of the loan itself. That said, it doesn’t hurt your credit as much as a foreclosure would. The waiting period to get a new mortgage also may be shorter. The final thing to know is that mortgage forgiveness may be considered taxable income, so it’s important to speak with a tax advisor.
What About Transferring My Property In A Short Sale?
As mentioned earlier, a short sale involves selling a property for less than the amount owed on the mortgage balance in order to avoid foreclosure. In order to do this, your lender or servicer has to agree to the short sale. In some cases, you may also owe the amount that your lender can’t recover from the sale, so it’ll be important to understand this and see if you can negotiate. Note that any forgiven debt may be considered taxable income.
Your lender also has to agree to the sale, which can lengthen the process. Typically, the lender pays fees associated with the sale. Another advantage is that this involves less of a credit hit than a foreclosure and the waiting period to get a new loan may be shorter depending on what you’re trying to qualify for.
Mortgage Loan Modification
A mortgage modification is when there’s some change to the original terms of your loan. This is done to make your mortgage payment affordable. If you can qualify to refinance, that’s the way to go to secure better terms. If credit or lack of employment prevent you from qualifying at this point, a modification could help you secure many of the benefits of a refinance.
There are several types of mortgage modifications. There are three basic ways that a modification can help you:
- Lowering your interest rate: Lowering your interest rate can make your payment more affordable. The major mortgage investors (Fannie Mae, Freddie Mac, FHA, etc.) publish a modification interest rate that lenders and servicers can offer. Depending on the terms of your modification, there may be adjustments to that interest rate over time. Speak with your servicer for details.
- Longer term: Modification terms can be as long as 40 years in order to lower your payment. The trade-off is that longer terms mean paying more interest over time.
- Principal forgiveness: If your lender does this for you, a portion of your outstanding balance is forgiven. The most likely scenario for this to take place is when you owe more on your home than it’s worth.
Although a loan modification can be helpful to avoid foreclosure, it’s important to understand the long-term effects on your credit score. Depending on the circumstances surrounding your modification, your credit score may or may not be impacted. In the case of being impacted by a natural disaster declaration, there’s more likelihood of leniency in terms of credit impact. But on the other hand, if your lender believes the original terms of your loan weren’t met and there's another reason for missing payments, that could have a negative impact on your credit score. Every situation is different, so be sure to ask your servicer how this will impact your credit history going forward before accepting a modification.
It’s important to note that in any case, your servicer doesn’t have to give you a modification. It has to be approved. Typically, you have to show some sort of financial hardship. This is a good time to talk about approval and all financial options.
How Can I Get Approved For Mortgage Loan Modification?
If you’re considering a modification of your mortgage, the first step is to raise your hand and ask for help. Rocket Mortgage clients can begin by filling out an application. The application process is going to vary depending on your reason for requesting mortgage assistance. However, in general, be prepared to share:
- Income documentation
- Information around your assets
- Bills or any other regular expense items
- Any information you have to share around the reason for your hardship
What Are Some Examples Of Financial Hardships?
Every client has a unique situation, but here are some common categories of financial hardships:
- Increase in medical expenses due to an illness or surgery
- Temporary loss of employment
- Permanent or long-term disability of either a client or one of their dependents
- Divorce or separation
- Natural disaster
- An increased monthly principal and interest payment for a modified loan that’s been adjusted within the last 12 months
A forbearance is a temporary pause in your mortgage payment. Although you’re required to pay back any missed payments eventually, this can give you the time to get back on your feet and figure out other options. Typical situations which might call for forbearance are a temporary loss of employment or rebuilding after a natural disaster, among other scenarios.
While you’re in forbearance, you don’t have to make payments. However, it’s a good idea to pay what you can. The more you can pay during forbearance, the less you’ll owe when it’s over. Rocket Mortgage clients can pay during forbearance with our custom payment options.
Once your forbearance ends, your servicer will qualify you for a repayment option. Your options will depend on the investor in your mortgage and initial reasons for forbearance in addition to your qualification factors. Here are some common alternatives to forbearance:
- Repayment plan: An amount will be added to your monthly mortgage payment for a certain period of time until your past-due balance is paid off.
- Deferral or partial claim: Some mortgage investors offer the opportunity to set aside up to a year of mortgage payments to be made when the property is sold, refinanced or otherwise paid off. You resume your regular mortgage payment. The one exception to this is if you have an escrow shortage during your forbearance. If that’s the case, it’s added to your monthly mortgage payment and paid off over 60 months.
- Modification: Your interest rate may be lowered, or your term extended, to make the payment more affordable.
You also have the option of paying off the full amount you owe immediately at the end of the forbearance. However, we understand that this isn’t possible for everyone.
Before entering a forbearance, you should speak with a financial advisor to make sure this is the best option for you.
Foreclosure Bailout Loan
A foreclosure bailout loan involves getting a loan to pay off what you owe and make your mortgage current. Unfortunately, the companies that do this sort of thing tend to charge high interest rates because they know people are typically in credit trouble and may have limited options. If you can avoid it, don’t take on this type of loan.
Rocket Mortgage doesn’t offer foreclosure bailout loans.
Reinstating a loan involves sending in one payment to pay off all past-due amounts. This includes principal and interest as well as any other fees, costs and corporate advances related to the lender’s costs during the foreclosure process.
If you’re able to come up with the funds for reinstatement, the sooner you can do it, the better. That way, fees don’t build up.
Avoiding Foreclosure: Frequently Asked Questions
Can I use a reverse mortgage to stop foreclosure?
If you’re 62 or older, a reverse mortgage may be an option for you to avoid foreclosure by using the payment from the reverse mortgage to pay off your current loan and then receive a payment for any other existing equity you have in the form of a lump sum, HELOC or a combination thereof.
You won’t have a monthly mortgage payment, but you will be responsible for property taxes, homeowners insurance and maintenance. If you don’t have the money for this, your reverse mortgage servicer can do a financial assessment and withhold part of your payment for these costs.
There’s no such thing as free money, and a reverse mortgage gets repaid one way or another when the last borrower sells the property, moves out or passes on. There’s an exception if they have an eligible non-borrowing spouse. When it comes to repayment of the reverse mortgage, your heirs have a few options:
- If they wish to keep the property, they’ll have to pay the lesser of the loan balance or 95% of the appraised value of the home. They can also do this by refinancing into a regular forward mortgage.
- They can also sell the property. Anything they make above and beyond the loan balance is theirs to keep.
- They can give the property back to the lender. A reverse mortgage is a nonrecourse loan, which means your heirs can’t be held responsible for owing more than the property is worth. They can also give the property back to the lender and it won’t show up as a foreclosure on their credit.
One thing to note about a reverse mortgage is that the amount you owe continues to build until it’s paid off. Because of this, the amount they would make in a sale may be greatly diminished for your heirs. It’s something to keep in mind.
What does ‘deed in lieu of foreclosure’ mean?
A deed in lieu of foreclosure involves signing your property back over to your lender. This avoids the drawn-out process of foreclosure and allows you to move on. You might be able to get moving assistance as well.
While this option is not as bad as a foreclosure, it’s still a significant hit to your credit. You could also end up owing the difference between your balance and what the lender can get in a sale. Finally, any debt that’s forgiven could be taxable in the same way it might in a short sale. If you have questions about tax implications, speak with a tax advisor.
The Bottom Line On Saving Your Home During Or After Foreclosure
If you're able to refinance into a lower payment before getting into financial trouble, that's the ideal option. However, that's not always feasible. While you can’t refinance while in foreclosure, you may have other options including loan modifications, forbearance, short sale or a deed in lieu of foreclosure.
For mortgage payment assistance, speak to your servicer.