Options to Explore if Facing Possible Foreclosure

Jennifer E. King for lawyers.com

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If you're having difficulty making your mortgage payments, there's truth to the maxim, "Ignore your problems and they'll go away." If you ignore your lender - and those pesky mortgage payments - the lender may go away, but he'll take your home with him.

In Nevada alone, one in every 39 households was in the midst of foreclosure in the first seven months of 2007, according to ForeclosureS.com, a company that tracks foreclosure data. Nationwide, the rate was one foreclosure filing for every 111 American households. That number is up sharply compared to the first seven months of 2006, when one in every 204 households was in the process of foreclosure.

Foreclosure is the legal process that occurs when a homeowners doesn't make required mortgage payments. The lender then follows certain steps to take possession of the property, after which it will usually be sold to satisfy the mortgage debt, as well as any other liens placed on the property.

There are a few reasons why foreclosure rates have sharply increased. Although interest rates are still low compared to the 1980s, rates have been climbing over the last four years. Buyers who initially took advantage of adjustable-rate mortgages may now be facing higher payments they can't afford. Many home buyers who relied on sub-prime loans - higher-rate mortgages issued to buyers with poor credit - cannot afford to keep up with the payments. Additionally, as the housing market has slowed, borrowers who are unable to make their payments may have a tougher time selling their homes in an effort to prevent foreclosure.

Homeowners should make every effort to avoid foreclosure, because it will negatively affect credit scores for up to 7 years, making it difficult or more expensive to obtain loans, credit cards and insurance. Here are several steps to take, and options to explore.

Talk to the lender that owns your mortgage. Explain the situation, and ask if it's possible to renegotiate your loan. Be open and honest about your financial situation, and let them know how much you can afford to pay on a monthly basis. Do not ignore calls and letters from your lender, and don't move out of your house, because you'll lose certain rights and privileges.

Contact a non-profit housing counseling agency. The U.S. Department of Housing & Urban Development (800-569-4287) can put you in touch with a local agency that will help explore your options and may help negotiate with lenders. These services may be available for free or at little cost; avoid for-profit counseling agencies that will charge you higher rates for the same services.

Sell your property. The housing market has slowed down, and it's taking longer to sell a house. The sooner you list your home for sale, the sooner you're likely to sell it. Remember, you're under no legal obligation to sell until you accept a buyer's offer, so while your house is on the market, you can still continue to explore other options that will allow you to keep your home and repay your lender.

Ask your lender for a forbearance. If a temporary problem - such as an illness or job loss - has prevented you from making mortgage payments, a forbearance will postpone all payments until you're able to pay. You will need to offer your lender a legitimate reason why you fell behind, and explain how you expect to afford future payments.

Ask for a deed in lieu of foreclosure from your lender. You may be able to give outright ownership of your home to your lender and, in return, your loan will be forgiven. However, you will lose your home, and you may not receive any cash from the lender if your home is worth more than the amount of the mortgage.

Ask your lender to reinstate your loan. If, after the foreclosure process begins, you acquire the money to cover your delinquent payments, you can ask the lender to reinstate your loan. You must do this before the property is sold, and you'll also need to reimburse the lender for any costs and legal fees it incurred as part of the foreclosure process. If you can pay off your loan in full, ask your lender to redeem you loan, which gives you full ownership of your home (assuming there are no other mortgages or liens).

Find out if you are eligible for other programs. Additional assistance may be available to borrowers whose mortgages are backed by government agencies such as the FHA, HUD and the VA. Members of the military on active service, as well as homeowners affected by natural disasters may also be eligible for relief and assistance. Your lender should be able to provide you with additional information.

File for bankruptcy. A bankruptcy filing will temporarily halt the foreclosure process, giving you time to sell your home. However, bankruptcy will negatively affect your credit for 10 years, so it's a solution to be avoided if possible.