4 Tips for Avoiding Foreclosure

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As bad as the foreclosure crisis is, it only seems to be getting worse. In the first quarter of this year, more than 900,000 households received a foreclosure notice in the mail and some analysts have estimated that at least 1 million homes will be repossessed by the end of this year. But that’s just the tip of the iceberg. There are also millions more homes that are at risk of being foreclosed on by 2012.

For many Americans, the foreclosure process is particularly stressful not just because of what’s at stake, but because consumers often lack the expertise to understand all the nuances of why their home is at risk and what they can do to save it. “This process is second only to rocket science in its complexity,” says Brian Sullivan, a spokesperson for the U.S. Department of Housing and Urban Development.

We spoke with Sullivan about a few simple steps that homeowners can take to avoid foreclosure, and have added in a few tips of our own. If you or someone you know has received a foreclosure notice or if you’re worried that you may be at risk, follow these tips to prevent the worst from happening.

Start the Dialogue Early

Even before a foreclosure notice gets tacked up onto your door, you should be prepared to act. “You should contact your lender as soon as you have a problem or anticipate one,” Sullivan said. If you or your spouse have recently become unemployed or been forced to take a salary cut, you should not hesitate to open a dialogue with your lender. You’ll definitely want to do this if you notice that one or more homes in your neighborhood are being foreclosed on, which could affect the prospects of your own home.

According to the Department of Housing, lenders are more interested in helping you keep your house than they are in trying to repossess it, but there are limits to their goodwill. “Begin to have a discussion as early as possible,” Sullivan said. This becomes even more important once you have been notified that your home is at risk of foreclosure. “An avoidance strategy can compound a home owner’s problems. If you’re one or two months behind, that’s better than when you’re nine or 12 months behind. A lender is much more willing to work with you if you’re just a little bit in trouble.”

Do Your Homework

Nothing is more tempting than trying to tune out the worst. Once you enter the foreclosure process, you may come to dread the letters you get in the mail from your lender, but be sure to read through them carefully. According to the Department of Housing, the first few notices you get from your lender should include details about foreclosure prevention options that are available to you.

Also, whether or not you’ve received a foreclosure notice, take the time to pull out your original loan documents to find out what penalties your lender can impose on you. “If you can’t understand your loan documents, sit down with a housing counselor now,” Sullivan said.

The Department of Housing has an extensive list of approved housing counselors by state.

Know What Your Lender Can Do For You

Contrary to what you might think, your lender does not have to be your enemy in this process. If you’ve fallen behind on payments and want to catch up, you might consider entering into a repayment plan with your lender that lets you break down what you owe into a more manageable installment plan, or you can see if you’re lender is willing to give you some time to catch up, a practice that’s known as forbearance.

Of course, these are ultimately stopgap measures that might not be suitable in more dire cases. If you are at the point where losing your home is the only option, there are a few ways you can minimize the damage. The two popular methods for people facing foreclosure this year have been short sales and deeds-in-lieu.

In a short sale, the lender agrees to let you sell off the home for less than it’s worth and forgive the outstanding debt in order to avoid the hassle and fees that come from the foreclosure process. As MSN Money notes, this ends up being a win-win for the buyer and the lender and is good for the seller in that it can keep you from facing foreclosure and bankruptcy. However, there is a good chance it will hurt your credit score.

There’s also the deed-in-lieu method in which you transfer the deed and all claims to the property over to your lender, essentially relieving yourself of your mortgage. According to RealtyTrac, this method will prevent you from enduring a foreclosure and additional mortgage payments, but if your lender chooses to report your mortgage as having been left unpaid, it could hurt your credit report down the road.

When All Else Fails

If for some reason your lender refuses to work with you on this process, you can contact the Federal Housing Administration for assistance. What you should not do though is hand your money over to a foreclosure prevention company. According to the Department of Housing, even if you find a reputable company to help you, they will only charge you excess amounts of money for services that the housing department can take care of for free. “Don’t give anybody money,” Sullivan said. “No one can guarantee they will be able to modify your mortgage. If anybody guarantees they can do this, you should run for the hills.”

Check out MainStreet.com's real estate section for everything you need to know about buying, selling and renting a home.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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