Homeowner's Options When Facing Foreclosure Text Size:

If you have a mortgage and are behind on your mortgage payments, your mortgage is in default, and your lender is probably trying to foreclose. There are several options that you can take to avoid foreclosure, which is the legal process used by lenders to take the real estate associated with your mortgage as payment for the unpaid debt. These options or alternatives include negotiating, refinancing, getting a "hard money" second, walking away from the transaction, filing a lawsuit for declaratory relief, giving a deed in lieu of foreclosure, reinstating the mortgage and redeeming the property.

Negotiation

Unless your default is intentional, the first step your attorney should take is to attempt to negotiate, or work out, some sort of settlement with the lender. Perhaps the lender does not want to foreclose but sees no other way to protect its interest. If that is the case, perhaps you can renegotiate the time and manner of payment or performance of some other term of the mortgage that was breached (not fulfilled or met).

Refinancing

Depending on the status of the financial markets, you may want to try to refinance and replace your old mortgage with a new one. The prime consideration here is whether you can refinance at a lower interest rate and thereby lower your monthly payments. You should make sure that there is nothing in your existing mortgage agreement or note, such as a high prepayment penalty, that makes refinancing less attractive.

''Hard Money'' Seconds

If you have enough equity or cash value in the property, which is measured by difference between the property value and the amount you owe on it, you may want to consider obtaining ''hard money'' financing to reinstate the mortgage. ''Hard money'' refers to the fact that you receive a cash loan secured by an encumbrance, a lien or claim, on the property as opposed to a purchase money secured loan. Because you are not borrowing nearly as much capital as you would if you were to refinance, the effect of a high interest rate is minimal.

Walk Away from the Transaction

If you have little equity in the property, if there is no chance you may be held personally liable for any amount still owed on the mortgage after the property is sold, which is called a deficiency judgment, and if you don't mind the stigma attached to a Notice of Default, you might be better off walking away from the transaction, which means allowing the property to go to sale without exercising any other alternatives.

Declaratory Relief

If there is a dispute over the rights and duties of the parties with respect to the terms of the mortgage, you may seek a court's declaration of such rights and duties, either alone or together with a demand for other relief. This is known as declaratory relief. If you are thinking about taking an action which may be questionable under the terms of the mortgage with the creditor, you may ask for a declaration of what the meaning of your mortgage contract is.

Deed in Lieu of Foreclosure

In order to avoid foreclosure, you may ask the creditor to accept a deed to the property instead of foreclosing. That way you will not have a Notice of Default filed against you and will not have to spend the time involved in a foreclosure. You may be able to escape liability for any deficiency resulting from foreclosure, an amount you may still owe after the real property is sold in foreclosure. It is unlikely, however, that the creditor will agree to accept a deed in lieu of foreclosure if there is a chance that the property is not worth more than the amount of the debt and if there is a possibility of recovering any deficiency from you after a foreclosure sale. The lender wants the mortgage to be paid, not to own the property.

Reinstatement of the Defaulted Mortgage

You may have a right to reinstate or cure the default on your mortgage, within a certain period of time after such default, as provided by state law. Generally, in order to reinstate your mortgage, you must pay the entire amount due on the mortgage at the time of default including the costs and expenses incurred in enforcing the terms of the mortgage and trustee's or attorney's fees.

Equitable Redemption

Because you have an interest, or ownership, in real property subject to a lien, you have the right to redeem or buy back the property after default, at any time before foreclosure. The equitable right to redeem is different from the right to redeem from the process in court called judicial foreclosure, as provided by state law. In order to redeem the property, you must perform or tender performance of your mortgage, the obligation in default, and you must pay or tender payment of the damages the creditor suffered as a result of your delay in making payments on your mortgage. Redemption removes the lien from the property because it pays off the mortgage in full.

Questions for Your Attorney

• If I am behind in my mortgage payments and trying to negotiate to avoid foreclosure, what terms should I try to change?
• What is a "hard money" second?
• What do I have to pay for in an equitable redemption?

Related Resources on Lawyers.com^sm