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What is a loan workout agreement?

Most lenders offer loan workout options. These options are available to individuals who are behind on their mortgages. The options include both short and long term solutions.

  • Forbearance: Your lender may allow you to reduce or suspend payments for a short period of time so that you may catch up to your payment schedule. Forbearance may be an option if your income is reduced temporarily, but you know you will have enough money to bring the account current at a specific time in the future, such as for disability leave.
  • Reinstatement: Your lender may be willing to discuss accepting the total past due amount owed in one lump sum by a specific date in the future. They will often combine this option with a forbearance.
  • Repayment Plan: You may be able to get an agreement to resume making your regular monthly payments in addition to a portion of the past due payments each month until you are caught up.

Other options that may be available to you include:

  • Loan modifications.
  • Federal and state programs.
  • Claim advances.
  • Bankruptcy.

How does loan modification work?

A loan modification is an appropriate solution for individuals who experience life changes that may permanently reduce their monthly income or shift their monthly budgeting priorities. Many lenders offer loan modifications that reduce the monthly payment amount in exchange for increasing the interest rate or extending the repayment period (or both). Unlike a loan workout agreement, a loan modification is a permanent change to your mortgage.

If you had a temporary setback and can now make the payments on your loan, but do not have enough money to bring your account current due to missed payments, your lender may add the missed payments to the existing loan balance during a loan modification.

If you cannot afford the total amount of your current payment, your lender may be able to reduce the monthly payment by:

  • Changing the interest rate, including making an adjustable rate into a fixed rate.
  • Extending the number of years you have to repay.

What federal and state programs are available to help homeowners facing foreclosure?

There are several government programs that may be able to help, if you qualify. Contacting the Federal Housing Administration (FHA), or your state or local government's housing agency can help  homeowners find out if they qualify for any foreclosure relief programs or other assistance. Federal and state foreclosure relief programs often help with loan modifications, forbearances, and getting relief from insurers for borrowers with mortgage insurance.

Generally, to qualify for relief, government programs may require that:

  • The property is your primary residence.
  • Your mortgage debt is below a certain threshold.
  • Your mortgage payment is more than a certain percentage of your gross income.
  • You suffered a financial hardship, such as a job loss or medical emergency.

What is a claim advance?

If your mortgage is insured, you may qualify for a claim advance from your insurer. This is an interest-free loan from your mortgage insurer to bring your account current with your lender. Mortgage insurers offer this as an option because if a foreclosure occurs, insurers end up paying lenders much more. The claim advance is typically paid directly to your lender, and if a foreclosure occurs after the claim advance, insurers receive a credit from the lender for the amount of the claim advance. Fortunately, for borrowers, repayment of a claim advance may be delayed for several years.

Can bankruptcy stop a foreclosure?

If you and your lender cannot agree on a solution, you may want to consider bankruptcy. If you qualify, it may be a temporary or permanent solution. If you have regular income, a Chapter 13 bankruptcy may allow you to keep your property, like a mortgaged house or car, that you might otherwise lose. Other options may provide more temporary relief, however, you may want to speak with a Legal Pro to evaluate what is best for your situation.

In a Chapter 13 bankruptcy, the court approves a repayment plan that allows you to use your future income toward payment of your debts during a three-to-five-year period, rather than surrender the property. After you have made all the payments under the plan, you receive a discharge of certain debts. While bankruptcy may sound like an appealing option, it's best to exhaust all other options before filing. Bankruptcies can stay on your credit report for up to 10 years, and once you file you cannot file again for a set amount of time. Choosing the right bankruptcy filing is also essential to effectively managing and discharging your debt.

If you have more questions about avoiding foreclosure or working with your lender, reach out to a Legal Pro for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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