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For homeowners, "foreclosure" is the ugliest word in the world. Foreclosure means losing your house and ruining your credit. There are plenty of things that might cause you to get behind on your mortgage, but it is always best for your financial future to take steps to remedy the situation to avoid foreclosure.
Talk to Your Lender
When you can no longer make your home loan payments or if you know that it will be difficult in the near future, contact your lender. The bank has just as much at stake in your mortgage investment as you do, and in most cases, it will be willing to work with you to keep you in your house. Do not ignore letters from your lender if you start to get behind!
Stay in Your House
Abandoning the property will not save you from foreclosure and will only make it harder to get mortgage assistance from your lender.
Appeal for a Workout Plan
You can work directly with your lender to avoid foreclosure or you can contact a housing counseling agency to help advocate on your behalf. Either way, there are some basic alternatives for which you may be eligible.
Refinancing: In some cases, you may be able to refinance your current mortgage loan to obtain a lower interest rate and monthly payment. In other cases you can pull equity out of your home with a refinance loan to pay off the delinquent payments and late fees.
Forbearance: Your lender may offer you special forbearance, a reduction or suspension of your payments for a short period, if you are temporarily unable to pay due to job loss or an injury. After the forbearance you may be required to pay the entire delayed payment amount in one lump sum, or you may be able to create a gradual repayment plan with the bank.
Mortgage Modification: Sometimes lenders are willing to change the terms of your current loan by extending your mortgage length, reducing your interest rate, or writing down your principal balance. This is only sometimes, though.
Short Sale: When you have exhausted the resources available to save your home, a short sale may minimize the damage to your credit score. This means selling your home for less than the remaining mortgage balance and it requires the approval of the bank, as they must agree to eat the difference.
Deed-in-Lieu of Foreclosure: Your very last resort may be to have the bank give the deed to your home to your lender in exchange for a cancellation of your mortgage debt. Both this option and the short sale will damage your credit, but not as much as a foreclosure.
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- How to Get Approved for an FHA Loan despite Bad Credit
- Should You Refinance? Make Sure the Timing is Right
- Short Selling a Rental Property