Loan Amortization

One of the biggest foreclosure myths is that foreclosure is a dead end—a vortex that you get sucked into eventually if you can’t make enough money to pay your mortgage debts. Fact is, foreclosure can be stopped as early as before it happens. In fact, the most common cause of inevitable foreclosure proceedings is refusing to respond to communications and notices from your creditor, until it’s too late.

The earliest signs that a foreclosure is forthcoming include: of course your current inability to pay your monthly mortgage amortization, and your impending inability to pay them. At this stage, the easiest way to stop home foreclosure is a foreclosure workout. A foreclosure workout is an independent arrangement between you and your creditor, which allows room for some flexibility so you can better manage your finances back into liquidity. Foreclosure workouts can take several forms. These include:

Short refinance scheme. Many home mortgage debtors have successfully saved their homes from foreclosure via this scheme, also commonly known as short pay scheme. To illustrate, say, you have an existing principal mortgage loan of $120,000, plus $20,000 representing payment arrears, attorneys’ fees and litigation costs. You can get someone to negotiate with the bank for a lower settlement, say, $90,000, and pay the negotiator the amount plus a premium of say, $5,000.

Loan modification. Here, the creditor consents to a change in the original loan terms, typically on a temporary basis. Modifications can include a reduced interest rate, application of current payments on a portion of the principal instead of the interest, or extending the terms to reduce the monthly payables.
Repayment plan. Here, the mortgage debtor pays part of the outstanding arrears and binds himself to pay the remaining balance of the arrears plus the regular monthly amortizations as they fall due. The arrears are spread out to a specific number of monthly payments. Creditors are generally amenable to this type of arrangement. If this flies for you, be ready to shell out half of your arrearages, in addition to litigation costs upon signing of the plan. The remaining arrearages can be spread typically over six months.

Deed in lieu of foreclosure. Under this workout, you will have to surrender the deed of the property to your mortgage creditor. In exchange, the creditor will write off any deficiency. This makes it a better option than foreclosure, where you will still be liable for any deficiency even after your home has been sold. Because banks stand to lose under this workout, you’ll have to earnestly negotiate.

Short sale. This workout involves selling the property to a third person and the proceeds go to the creditor bank as full payment of the mortgage debt. A word of caution when attempting to negotiate this workout: make sure that you won’t be asked to pay for the deficiency after the short sale. Otherwise (and there are banks that try to do this), the sale is no better than foreclosure.

Repurchase within the redemption period. Foreclosure sales aren’t always the end of the world. After the property has been sold at public auction, the debtor is usually given some time to buy back the property. If the foreclosure has been consummated, use the redemption period to generate enough funds to buy it back.