Stay Away From Foreclosure

Financial losses, medical emergencies, or corporate downsizing can still happen to anyone despite the rosy economic picture. It's not unusual to be down on your luck. But don't get down on yourself. It's important to keep a clear head, especially if you are faced with a foreclosure on your home. There are ways to avoid foreclosure that should be explored, says Jim DeBoth in Your Mortgage.

First, you don't want foreclosure to create a spot on your credit record that could stay with you for years. Remember that your lender doesn't relish the idea of foreclosure any more than you do. Mortgage companies are in the business of lending money, not buying and selling real estate. It's too much trouble and too expensive to get involved with lawyers and the courts. You share an interest with the person in the best position to help you avoid foreclosure--your lender. The point is to work with your lender as an ally.

Communicate Early and Often. As soon as things get bad, start talking to your lender about the status of your mortgage. See if you can work out a payment plan. Instead of letting mortgage payments slide without saying anything, call your lender--you'll have a better chance of resolving matters before they get out of hand.

Set Up a Payment Plan. For example, your lender might agree to deferring payments for a while. You can make up what you owe once you find a job, gradually, by paying a little extra every month. Or the lender might agree to lowering payments to get you through lean times. Either way, you'll have to make up the difference, and pay interest on it, and possibly pay a penalty in the form of extra processing fees. But remember it's all part of an effort to avoid the worst-case scenario of losing your home. On FHA-backed loans, inquire about the Federal Housing Administration's hardship plan but remember that FHA requires things to be bad to qualify. On VA loans, the Veterans Administration might be able to develop an alternative payment plan.

Sell the House. If you have exhausted all the possibilities, and you still can't afford to keep the house, then put it on the market. Get a professional appraisal to determine what the house is worth. Hopefully it's worth more than you owe. If you sell for the market value, then you can pay off your mortgage (and any back payments or penalties) and hopefully have something left over.

Consider Deed In Lieu of Foreclosure. This approach involves selling at a loss when the home is worth less than what you owe the lender. For example, the home might sell for $80,000 but there is $86,000 left on the mortgage. The lender might be willing to waive the $6,000 difference. It's what the lender calls a "short sale." Unfortunately, even though the lender writes off the loss, you'll be paying taxes on that $6,000. But remember the alternative--foreclosure and a bad credit mark.