Refinancing or restructuring your home loan in foreclosure is a difficult but not impossible undertaking.

As foreclosures skyrocket, lenders are more willing to work with borrowers to either refinance or restructure existing home loans in order to stave off a foreclosure sale. However, oftentimes homeowners are simply unable to afford their home given their income or a change in their financial condition since purchasing the home.

When considering the refinance/restructuring option, it is important to contact a lender as soon as possible.

The longer you wait, the less likely the possibility of refinancing or restructuring your home loan(s).

Once your lender initiates foreclosure proceedings, the lender will have reported your late mortgage payments and will have incurred fees and costs that must be repaid in a refinance transaction.

 Restructuring Your Home Loan

From the lender's perspective, restructuring your home loan can save thousands of dollars when compared with the alternative of proceeding with foreclosure.

The combination of the loss of mortgage payments (6 months to a year) and the costs associated with foreclosure proceedings can result in tens of thousands in lender losses. By restructuring a loan with a qualified homeowner, the borrower is able to not only save money but also to leverage positive public relations associated with its willingness to assist the troubled homeowner.

However, the first step in your efforts to restructure your home loan is to determine who to contact.

In most transactions, your home loan is sold by your initial lender shortly after closing, and may be sold several times thereafter. Once you determine who actually owns your loan, contact the lender and ask to speak to a loss mitigation specialist or the individual who has authority to negotiate a loan restructuring program within the lending institution.

The restructuring of your home loan usually involves three options:

1. forbearance;

2. a repayment plan; or

3. A loan modification.

In forbearance, the lender agrees to relieve the borrower of one or more mortgage payments when the borrower faces an unexpected expense, illness or job change. The missed payments are usually recovered by the lender in a repayment plan (see below).

If you are seeking forbearance, contact your lender as soon as you learn of your inability to make a mortgage payment. The sooner the lender knows of your cash flow difficulties, the more likely the lender is to grant the forbearance.

In a repayment plan, the lender agrees to recover missed payments by tacking past payments onto future payments. The lender will usually require the borrower to pay a lump sum up front then the remaining monies owed may be spread over several future mortgage payments.

This option is good for those who experience unexpected costs such as car repairs, medical bills or short-term job loss.

Conversely, the purpose of a loan modification is to assist borrowers who are unable to afford repayment plans. In a loan modification, the lender will actually change the loan terms. For example, a 360 month loan (30-year) may be extended to a 365 month term, or an interest rate may be lowered from 6.5% to 6.4% in order to make the monthly payment more affordable.

The repayment plan can also involve the lender adding monthly payments to the end of the loan period. For example if the borrower missed two payments and is unable to repay the missed payments, the lender may agree to add two additional months to the mortgage in order to save the loan.

The option of restructuring your home loan can be a significant benefit to those who have suffered a temporary income setback.

Any long-term change in income or expenses should carefully consider whether to pursue the restructuring option.

 Refinancing Your Home Loan

When facing foreclosure, shopping for a refinance loan can be a challenging proposition to say the least.

In this rapidly deteriorating mortgage loan market, even the most qualified borrowers are experiencing a difficult time refinancing their home mortgage.

In most cases, Washington homeowners have two refinance options:
1. A "Short Refinance" and
2. A Hard Money Loan.

In a "short refinance", the lender agrees to forgive some late payments then refinance the remaining loan balance into a new loan.

A "short refinance" is most often undertaken and funded by the homeowner's existing lender. While an attractive option, the "short refinance" is usually only available to those homeowners who maintain sufficient income, credit scores and have not slipped too far into foreclosure.

In a hard money loan, the money is usually loaned by an individual and the loan requirements are far less stringent than in a traditional mortgage loan. A hard money loan is usually an option when the amount of the loan when compared with the value of the property is 70% or less.

This is called loan to value, LTV. For example, if a property is worth $100,000 and $50,000 is owed on the property then a hard money lender will more than likely be willing to loan on the property as the LTV is 50%.

While a hard money loan may be available, the interest rates charged by hard money lenders greatly exceeds the interest rates charged by traditional lenders. Additionally, the loan term in a hard money loan is usually between 1-5 years.

Thus, the hard money loan is not a long-term solution to a distressed mortgage, but quick fix because the hard money loan must be refinanced when it comes due.

 What is your best option?

The best option always depends on your individual circumstances.

When deciding whether to refinance or restructure your home loan, it is important that you carefully analyze your financial situation and determine whether continuing to pay a mortgage is in your best interest.

Some things to consider when analyzing your situation include:

  Type of Mortgage:

- If your home loan is an adjustable rate or negative amortization loan, it may be best to simply sell your home rather than refinancing or restructuring the loan. Even if you are able to restructure or refinance your home loan, you may still face regular interest rate adjustments that will cause you to face another foreclosure when your monthly payment increases.

  Disposable Income:

- How much of your disposable income goes towards a mortgage. Most experts agree that a home mortgage should not exceed 60% of your net monthly income.

  The value of your home.

- If you have little to no equity in your home, it may be in your best interest to either sell the home or offer your lender a deed in lieu of foreclosure. To obtain a price opinion on the value of your home, contact a licensed real estate broker for a Comparative Market Analysis (CMA) that will provide you with a realistic idea of the selling price of your home.

  Potential Appreciation.

- If your home is located in an area where home values are flat or declining in value, it may be wise to consider selling your home and renting until such time as you are better equipped financially to afford a house payment. Also, if you can save money and improve your credit, you will be in a much better position to obtain a more favorable home loan the next time you decide to purchase.

 More Information

For more information on restructuring or refinancing your home loan to avoid foreclosure, please don't hesitate to contact us to discuss your questions. We can be reached by phone at: (206) 442-9500 (Toll-free: 1-800-206-6122).