Deed-in-Lieu of Foreclosure – This option is a disposition option in which a borrower voluntarily deeds collateral property to the servicer/lender in exchange for a release from all obligations under the mortgage. Though this option results in the borrower losing the property, it is usually preferable to foreclosure because the borrower mitigates the cost and emotional trauma of foreclosure. In most cases, the Insurer/Guarantor requires this option to be used only after all other options have been exhausted.
Informal Repayment Plans – Plans that are usually short term in nature and is established on the borrower’s ability to repay. This program is used mostly when a loan is in early stages of delinquency (30-60 days delinquent) with a repayment term of 90-120 days. This plan can be verbal or written.
Formal Repayment Plans – This is the most widely used program for a loss mitigation work-out. Financial screening is obtained from the borrower and based on their ability to repay the arrearages, a plan to cure the delinquency is established. Counseling usually is offered to the borrower. Formal repayment plans are always written and can have a much longer term than the informal plan. Based on the borrower’s overage at the end of the month, formal plans are usually set up for a payment and 1/4 or a payment and 1/2.
Loan Modifications – A loan modification is a permanent change in one or more of the terms of a borrower’s loan which, if made, allows the loan to be reinstated and results in a payment the borrower can afford. Modifications may include a change in the interest rate, capitalization of the delinquent principal, interest or escrow items, extension of the time available to repay the loan, and/or reamortization of the balance due.
Loan Servicer – Loan servicers are contracted by mortgage lenders and secondary market loan holders to manage the day-to-day payment collection and payment processing of escrowed items such as real estate taxes and homeowners insurance. They are responsible for collecting, monitoring and reporting loan payments.
Loss Mitigation – This is a process to avoid foreclosure in which the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on the mortgage loan.
Mortgage Lender – The lender provides funds for a mortgage. Lenders also manage the credit and financial information review, the property and the loan application. Mortgage lenders often release servicing to another organization (loan servicer) which means that the customer won’t necessarily send their mortgage payments to the company that made or originated the loan.
Partial Claim – Under the partial claim option, a servicer/lender will advance funds on behalf of a borrower in an amount necessary to reinstate a delinquent loan. This amount should not exceed the equivalent of 12 months PITI. The borrower, upon acceptance of the advance will execute a promissory note and subordinate mortgage payable to HUD. Currently these promissory or “partial claim” notes carry no interest and are not due and payable until the borrower either pays off the first mortgage or no longer owns the property. (This option is only available if you have an FHA insured loan.)
PITI – This acronym stands for “Principal, Interest, Taxes and Insurance” and represents the four elements of a monthly mortgage payment. Payments of principal and interest repay the mortgage loan, while the portion that covers taxes and insurances (homeowners and mortgage, if applicable) goes into an escrow account to cover those fees when they are due.
Short Sale / Pre-foreclosure sale / Compromise Sale – These all mean the same thing. This option allows a borrower in default to sell his or her home and use the sale proceeds to satisfy the mortgage debt even if the proceeds are less than the amount owed. This option is appropriate for borrowers whose financial situation requires that they sell their home, but who are unable to sell without the insurer/guarantor relief because the value of the property has declined to less than the amount owed on the mortgage.
Special Forbearance – A special forbearance is a written repayment agreement between a servicer/lender and the borrower which contains a plan to reinstate a loan that is delinquent and must provide the borrower with relief not typically afforded under an information or formal repayment plan. The term of the plan can be four or more months, suspension or reduction of payments for one or more months to allow the borrower to recover from the cause of default, and/or an agreement to allow the borrower to resume making full monthly payments while delaying repayment of the arrearage.
Subprime Loan – Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.