When Good Mortgages Become Delinquent: Strategies for Borrowers to Avoid Foreclosure

Obviously, this is a scenario in which no homeowner hopes to find him or herself, as well as one which no lender hopes to pursue. Foreclosure actually costs the lender money that can't be recouped through the sale of the property. If you're behind on more than three or more payments, read on for strategies for avoiding foreclosure.

Initiate honest, open communication with your lender. Mortgages are big money for lenders, which is why many attempt to entice homeowners through attractive offers such as low adjustable-rate mortgages and cash-out refinancing. Because the lender doesn't want to lose the mortgage and ultimately lose money, they will generally be willing to work with you to rectify the situation, provided that you have a history of making consistent payments with no prior serious defaults and approach the situation ethically.

Conveying accountability is essential in negotiating alternative payment arrangements. Financial experts recommend preparing a financial disclosure package to present to the lender. This package should detail your current financial situation, including all income, assets, liabilities, debts, payments, and tax returns. Experts also suggest obtaining a rough appraisal of the home’s current market value. In addition, you may wish to supplement the package with written plans for bringing the loan current and your own strategy for avoiding missing another mortgage payment.

Depending on the circumstances surrounding the delinquent mortgage, your financial status, your prior history with the lender, the home’s current value, and the strength of your financial disclosure package, you may be able to develop a loan payment plan that establishes a new, realistic payment schedule.

Sometimes lenders grant a temporary indulgence if the delinquency is caused by a temporary condition that can be remedied within a month or two. However, securing indulgence requires documentation of the condition and is most realistic for situations such as those where the home has been sold but the sale has not been settled or pending insurance settlements.

Let’s say that you or your spouse has been laid off from work and you renegotiated your adjustable-rate mortgage under low home refinance rates thinking, at the time, that you’d save money, but since then you’ve been unable to find work and mortgage rates have risen, causing your mortgage to become delinquent. In this case, you may be able to suspend or reduce payments for a specified length of time. This option, known as a forbearance plan, does not last more than 18 months on average and will often stipulate that the lender will commence foreclosure immediately if you default on the plan.

For situations in which you may have suffered a short-term loss of income but your income has since been reinstated, you may be able to finesse a repayment plan to fulfill the default payments as well as any late payments or fees within a reasonable amount of time, usually between 12 and 24 months. Experts say that for many homeowners, repayment plans are the best and most likely type of workout agreement.

Foreclosure isn't the only option once a mortgage becomes delinquent, but it remains a looming possibility without a detailed, realistic plan to bring it current. And while mortgage lenders are sometimes willing to help out homeowners who find themselves in a bind, those homeowners who have not demonstrated consistent financial responsibility in the past are much less likely to receive assistance. By the time a mortgage becomes delinquent, a homeowner with a poor track record may find that even the above strategies are too little, too late.