When Home Loan Modification Fails: Your Alternatives

Home loan modification is no doubt the most popular way for homeowners to avoid foreclosure and stay off the streets. But let's face it, loan modification doesn't work out for everyone, and some people are simply better off with other forms of loss mitigation. Most people view these alternatives as "last resort" options, but that's not always the case. Depending on your situation, they may work better for you in the long term than loan modification.

That's why it's important to know your options. If you've been turned down or simply want a backup plan, here are some of the most popular home loan modification alternatives to help you out.

Forbearance plan: In this plan, your lender temporarily reduces your monthly payments so that you can get your finances in order. Once you're back on track, you pay off the difference and return to your regular payments. This is usually offered to people who have suffered temporary income loss, have been refused a home loan modification, and who can prove that they can improve their situation within 6 to 18 months.

Partial claim: In a partial claim, your lender gives you a loan to pay off your arrears and reinstate your mortgage. You will then continue paying your existing mortgage as is, and start paying the partial claim once the original loan is paid off, or when the property is sold. This method works best for people who have suffered a temporary hardship and have since recovered, but do not qualify for a regular home loan modification.

Short sale: A short sale, sometimes called a pre-foreclosure sale, involves selling your home for less than the amount owed on it, usually at a price that you and your lender have agreed on. The proceeds of the sale are then forwarded to your lender and considered full payment for the loan. This means you still lose your home, but unlike foreclosure, it doesn’t do as much damage to your credit score.

Deed in lieu of foreclosure: As the name suggests, the deed in lieu of foreclosure allows you to turn over the rights to your property to the bank instead of going through the whole foreclosure process (which ends up with the same thing anyway). This is usually done when home loan modification and other loss mitigation methods have failed to rescue the loan. This is sometimes called "voluntary conveyance of property rights".