How to Avoid Foreclosure

Foreclosure prevention tops the wish list for many American homeowners; but avoiding foreclosure in today's market can be extremely challenging. It is possible, however, and borrowers should pursue solutions to avoid foreclosure--especially opportunities for loan modification.
 
About a quarter of a million people per month face foreclosure across the U.S.; but with mortgage companies and credit counselors overwhelmed and backlogged, few homeowners know what to do to avoid losing their homes.  Here are several ideas and insights intended to help those confronted by a looming foreclosure to sidestep the harsh outcome.

Loan modification

Many mortgage companies and banks lose as much as 50 percent of their stake in a property if it goes all the way to foreclosure.  Therefore, they'd much rather use a loan modification for foreclosure prevention.  Lenders don't usually have the best interest of the borrower in mind, but they still share the same common goal: foreclosure avoidance. When you communicate with your lender, keep their needs in mind, as well as your own. It may be easier to discover a mutually beneficial solution.

Get your docs in a row

Any foreclosure prevention strategy will be based almost entirely on market data, credit scores, and other pieces of information. The person working with you on behalf of the lender may never actually see your home, but will determine possible paths to avoid foreclosure based on a file-or pile-of paperwork. Many homeowners trying to avoid foreclosure have two mortgages with the same lender.  By demonstrating an inability to pay both, they may be able to talk the lender into waiving a portion of the principal. Or the lender may allow the homeowner to consolidate two loans into one with a lower interest rate. Another way documentation comes in handy is when a homeowner wants to show the ability to handle a fixed-rate mortgage if the lender is agreeable to refinancing out of a problematic adjustable-rate loan.

Present a hardship case

Those suffering a temporary setback due to circumstances such as illness, job loss, death of a spouse, divorce, or other hardship can write a letter to lenders explaining the situation. Many mortgage companies will provide some form of relief through a temporary suspension of payments or loan modification to assist the borrower until he recovers from the crisis and gets back on his feet.

When all else fails and foreclosure prevention seems impossible, homeowners may be able to do a so-called "short sale," which involves selling the property and giving the proceeds to the lender to cover the outstanding balance. In many cases, the money will not be enough to satisfy the entire mortgage debt, but lenders agree to forgive the amount that comes up short. The homeowner loses the home through this strategy, but at least he can avoid foreclosure and credit ruin.