In Florida and Ohio, the foreclosure process is typically started with a formal demand for payment, known as the Notice of Default. The lender issues the Notice of Default to the homeowner after there has been a three-month delinquency in payment. If the homeowner does not resolve the delinquencywithin 30 days, the lender may initiate the foreclosure action by filing a complaint with the court. Once the complaint is filed and served, the homeowner must respond to the complaint before the lender may seek default judgment in its favor.
Foreclosure comes with a heavy cost to both lenders and borrowers and so it is usually in everyone’s best interest if the parties can resolve the default without foreclosure. By discussing foreclosure alternatives early on, homeowners may provide themselves with more flexibility to negotiate a solution to avoid foreclosure. However, the homeowner will still have the right have of redemption after the foreclosure lawsuit has been initiated.
Possible Foreclosure Alternatives
Depending on the circumstances, the lender and homeowner may be able to resolve a mortgage default without foreclosing the home. Below are common options:
Deed in lieu of Foreclosure- This is a voluntary return of the property as an alternative to foreclosure. This option is best for homeowners with little or no equity in their home and no second or junior mortgage on their property.
Loan Modification- This is a written agreement between the lender or servicer and the homeowner to reduce the interest rate or principal amount or to extend the loan term period. Modifying the terms of the mortgage can make the mortgage more affordable for homeowners struggling financially.
Re-amoritization with capitalization of arrears- This is agreement between the lender and the homeowner to spread the missed payments out over the life of the loan. This will remove the payments that are in arrears, but may increase the monthly payment. Thus, it may be more effective to combine this option with a modification that also reduces the monthly mortgage payments.
Short Sale- With a short sale, the lender allows property to be sold for market value through a realtor in a "short sale" as an alternative to foreclosure.
Repayment plan – This involves curing the default by making regular monthly payments and partial monthly payments on the arrears. This option is best for homeowners with temporary financial problems that have now been resolved.
Forbearance Plan- This is similar to a repayment plan, but more formal. A forbearance plan will be in writing and is usually more long term than a repayment plan.
Recasting/Deferral of missed payments- missed payments are cancelled and added to the end of the loan term. Many large banks unwilling to recast.