Three common solutions for foreclosure are loan reinstatement, a forbearance agreement, or a loan modification. While there are numerous other specific ways to stop foreclosures, these three are used frequently.
Loan reinstatement is where a lender has started the foreclosure process and the homeowner finds a way to "reinstate" or pay back the entire deficiency owed. The deficiency amount includes back loan payments, accelerated interest costs, attorney's fees, assorted expenses, and late penalty charges. This total amount can accelerate quickly and recently lender's indicated that pre-payment penalties may in the future be included into final judgments. When the homeowner's reason for the delinquency is partially resolved, the homeowner may ask the lender to take partial payments. However, the lender will not accept partial payments and the foreclosure will proceed if the full reinstatement amount isn't paid.
A forbearance agreement between the lender and the homeowner stipulates that the homeowner must make additional monthly payments for a specific period to make up the reinstatement amount. As simple as it sounds, it may be unaffordable for the homeowner who could barely afford the original loan payment. The lender will usually ask that the homeowner pay the reinstatement amount over a three or six month period. If the monthly loan payment was $2,000 per month and he was 3 months in arrears, the new monthly payment for a three month period would be at least $2,000 + $6,000/3 = $4,000 per month. For a six month repayment schedule the new monthly payment would be $2,000 + $6,000/6 = $3,000 per month. In some instances the lender may ask for an additional cash payment before they will start the increased monthly payments. After the 3 or 6 months, the loan payments revert to the original amount or $2,000 in the above example. The foreclosure does not stop with the signing of the forbearance agreement but simply is put on hold until the homeowner completes making all the increased payments.
A loan modification program was the most common method of foreclosure resolution for many years. It involved the lender issuing a new loan agreement where the deficiency amount was added to the loan balance and paid in identical monthly payments but for many more months. Another type of loan modification was to very slightly increase the monthly payments over the remaining term of the loan. So the homeowner has a choice of either extended but identical payments, or slightly higher payments for the original term of the loan. Either option repaid the lender his money back plus interest. It was an affordable win-win for the lender and the homeowner but is seldom offered anymore.
Loan modification programs are usually not available unless there is a hardship involved such as a death or illness. But it is worth asking your lender about it if you are in foreclosure. Your best option is to talk to your lender and as early as possible so you have time to resolve your problem.