Steps to Avoid Foreclosure

by admin on November 11, 2013

Foreclosure is a process whereby the borrower is unable to meet his interest and principal payments, and the financial institution attempts to recover the outstanding balance.

Reasons for Foreclosure

There are many reasons why borrowers experience financial problems:

• Unexpected home maintenance expenses

• Excessive credit card debt and other obligations

• Loss of second income

• Car loan falling behind

• Family problems or divorce

• Death

• Injury, illness, hospitalization

• Loss of employment

Options to Avoid Foreclosure

Borrowers are offered different options such as loan modification and refinancing. The goal is to make monthly payments more affordable. To this, debtors may request readjustment or lower interest rate. A repayment plan is an option that allows borrowers to pay the amount past due. Forbearance is another arrangement under which the lender reduces or suspends the monthly payments over an agreed period. Taking control of spending is also a way to avoid foreclosure by outlining your spending priorities. If you cannot work, are unemployed, or are sick, you need to reconsider your spending habits and expenses – clothing, daycare, car maintenance, groceries, home repairs, etc.

Settlement, Consumer Proposal, and Other Options

If you foresee financial struggles, it is important to communicate with your financial institution. Your options depend on your financial situation. For example, if you have enough equity, the lender may agree to re-calculate the loan in order to account for the back payments. Your mortgage insurance also offers protection in case you are unable to make payments. Settlement is another option for debt-ridden borrowers. This is a way to avoid severe marks on your credit record. Consumer proposal helps borrowers to freeze interest and consolidate their debts. Borrowers negotiate with their financial institution to repay a portion of the outstanding balance. For instance, if a borrower owes $75,000, the lender may agree to accept 30 percent less or $52,500. Thus the debtor pays $22,500 less. While your credit score will suffer, this is a way to protect your assets, including your house, vehicle, RESP, RRSP, and so on. The term of repayment is longer (up to 5 years) to allow borrowers to pay off their outstanding balance over an extended period, making payments more affordable and manageable. There are two options – monthly and lump sum payments.

Already in Foreclosure

There are several options in this situation, and one is to sell your house. You may have to change schools and neighborhoods, however. Deed-in-lieu of foreclosure is when the borrower gives the financial institution the deed. The foreclosure procedure ends, and the bank forgives the loan. The lender may also accept an arrangement under which the debtor remains in the house and pays rent within a specified period. Renting out your property and finding private financing are other options to avoid foreclosure. Some borrowers also resort to equity sharing. This is a situation whereby a partner, friend, or third party agrees to pay to stop the process. In exchange for this, the latter becomes a co-owner and owns a certain percentage of the property. Another option is to sell your property to a third party and pay rent. The main benefit for debtors is that they save on property maintenance fees, court fees, lawyers’ fees, as well as penalties. This arrangement can be in the form of “rent to own” whereby the debtor buys back the property over a specified period.

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