Monday, December 22, 2008

How to avoid foreclosure


Here are some ways to cope when you have fallen behind on your mortgage payment.

NEW YORK ( -- President Bush signed the housing bill Wednesday. And while the part of the bill that allows homeowners who cannot afford their monthly payments to refinance into government-backed loans may be implemented as soon as October there's been some question as to whether it's going to take longer than that. If you are in danger of foreclosing on your home there are some steps you can take now.

Know the timeline
Once you miss a payment, your lender likely reports that to the credit bureaus.

And with every missed payment, your credit score goes down. Plus, you'll start getting hit with late fees. After 90 to 150 days in most cases, your lender may file a notice of default with a local courthouse. You'll probably get a letter saying the foreclosure process will start, unless you become current on your payments.

If you don't become current, you may have anywhere from 2-3 months to a year before the house is put on the auction block according to David Petrovich, author of Fight Foreclosure.

Get a loan modification
Try to get a loan modification before you even miss a payment. This is probably the least onerous of the options out there, if you can get it. This is basically a change in loan terms. A modification will lower your monthly mortgage payment or let you skip a few payments. Bottom line here is that the term of your loan will be extended.

To request a modification, call your lender and ask to be transferred to the loan modification department. Make sure you have some recent pay stubs, current or prior year W-2 forms, bank statements, property tax bills and insurance bills.

If possible, obtain appraisal information for your home. And the process can be frustrating. It could take weeks. "It's up to you to be proactive, persistent and aggressive, says Petrovich. "Loss-mitigation departments are overwhelmed, under-staffed and under-experienced," he says.

He says lenders will likely devote more attention to your case, the closer you are to having your home sold at auction.

Consider a sale
If you can't afford your mortgage, your best bet is to sell your home. But...if you owe a lot more on your home that it's worth, you may be able to get the lender to accept less than you owe on it by negotiating a short sale.

Basically you sell the house for what you can get and the lender agrees to accept it. In some cases the deficit will be forgiven, but in other cases you may have to sign an unsecured loan for the amount. Negotiating a short sale isn't always easy.

"Lenders are not as receptive to short sales as I thought they would be," says Petrovich. "Lenders are not willing to accept these losses gracefully." You generally have to write a hardship letter, indicating why you can't make the mortgage payments.

The bank usually controls the negotiations and you don't have much say in the process. And keep in mind the process is slow. It can take 4-5 months from the first time you submit your package. You can also do a deed-in-lieu transaction.

With a Deed-in-Lieu transaction, you hand over your deed to the house to your lender. In return you are released from your mortgage. But lenders cannot be forced to accept a deed. In fact, you may have to have tried to do a short sale and failed.

So, having your lender accept a deed-in-lieu can be challenging. We've talked about some alternatives to foreclosure. But sometimes, it's unavoidable. Having a sheriff's sale on your credit report is a black mark you'll want to escape if possible.

If this is inevitable, keep in mind that you can still repair your credit. Typically foreclosures are on your record for seven years. And don't forget that you're not alone. There are millions of families that are going through exactly what you are going through .

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