7 Ways to Avoid Foreclosure

1. Bring You Loan Current: The majority of foreclosures are due to loss of income.

There may be no way to catch up on the loan. If you expect a source of income in the near future, it may benefit you to ask family or friends for a short term loan.

2. Loan Modification: Most homeowners do not contact their lender because of embarrassment, and/or don't believe the lender can help. Loan modification is when the bank agrees to reduce principal, interest, and/or payments. Keep in mind, while going through the loan modification process, it does not necessarily stop the foreclosure. Communication is key during this process.

3. Forbearance: This is when your lender allows you to delay your payments or spread your missed payments over a specified number of months until you are caught up. Again, if you expect a source of income in the near future, then this may be a good solution for you. Keep in mind that until you're past due balance is current, this will report negatively against your credit, even during months when you are paying more than required.

4. Deed in Lieu of Foreclosure: Be sure to confirm this with your lender, with a "deed in lieu of foreclosure", you give your home to the lender (the "deed") in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings." This option, if accepted by the bank, is a quick and easy way to walk away from the house, doesn't require a sale, and may look better on a credit report than other options. Be certain to get this agreement in writing and understand what the lenders plans are for any unpaid payments.

5. Bankruptcy: This is misunderstood and possibly the worst option for you. Bankruptcy will only slow a foreclosure, not eliminate it. Most mortgage documents state that if the property goes into default, the bank will take back the property through foreclosure. Not ideal, you will have both a bankruptcy and foreclosure on your credit report for the next 10 years! Plus, you may still be required to work out a repayment plan for the house. Seek legal counseling prior to deciding on a bankruptcy.

6. Foreclosure: Do nothing and let the bank take the house back. This is the one this that will negatively impact your credit score the most. Your credit score could drop 200-300 points and prevent you from purchasing another home for 24 months. The lender may sue you for unpaid amounts or for the difference between what the house sold for at auction and what you owed. Or they may send you a 1099, stating that the difference is income and you can be taxed on it.

7. Short Sale: A short sale is when a third party negotiates with the lender to accept a discount on what is owned and release their interest in a property in exchange for a cash payment. The seller is not allowed to financially benefit from the transaction. It is better to use the services of a Real Estate Investor rather than a Realtor. An investor has more experience with these types of creative scenarios than a Realtor. Plus, the investor will agree to purchase the house, providing the bank with a signed Purchase Agreement. This Purchase Agreement increases the likelihood of a bank accepting a discount. Most Realtors try to negotiate with the bank and then find a buyer after the negotiations. This strategy leads to a very low success rate.

7 Ways to Avoid Foreclosure

By: Kate O'Toole

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