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How to Guard Against Foreclosure

Peter McDougall

Homeowners who are concerned about the risk of foreclosure may have more options than they realize.

The current rash of foreclosures (up 5% from February to March 2008, and 57% from March 2007 to March 2008, according to RealtyTrac.com) is largely due to aggressive lending practices that landed homeowners in overpriced homes they couldn't afford, with ballooning mortgage payments. This left homeowners with few choices but to default on their mortgages and let banks foreclose -- losing their homes and their credit in the process.

Other foreclosures are a result of more traditional causes: loss of income, divorce, medical expenses and even death.

Even if foreclosure is the last thing on your mind right now, there are a couple of things you can do to avoid problems down the road:

• Save money: By putting aside a little extra each month, you can create a rainy day fund that can help cover your mortgage payments and other housing costs should you experience a temporary loss of income. Saving the equivalent of three months of expenses is a good target.

• Reduce expenses: If you find that your budget is too tight to set aside more money, try to reduce your unnecessary expenses, like cutting back on eating out or canceling your subscription to the premium cable channels you rarely watch.

What if your home is already at risk of foreclosure? Even after you have missed your first mortgage payment, there are things you can do to save your home.

A popular misconception is that banks and lenders want you to default on your mortgage. The reality is that foreclosures are costly for both parties -- banks and homeowners. (On average it costs $40,000 for lenders to foreclose on a home, according to an article in The New York Times.)

Government agencies like the U.S. Department of Housing and Urban Development (HUD) and non-profit organizations like NeighborWorks offer this advice to homeowners in trouble: Get in touch with your mortgage lender immediately.

Depending on how quickly you start the discussion, lenders can offer various options that might forestall a foreclosure.

Some involve keeping your home (retention options):

• Forbearance: This option allows you to make reduced mortgage payments (or even skip payments) for a period of time.

• Reinstatement: This option allows you to make a lump sum payment for what you owe, sometime in the future.

• Modification: In essence you alter your mortgage, changing your interest rate and/or the term of your loan.

Others involve losing your home, but help you to avoid the costs and difficulties associated with foreclosure proceedings (liquidation options):

• Short sale: This is where you sell the house for less than what you owe and the lender considers that sufficient to settle the balance due on the loan.

• Deed in lieu of foreclosure: You hand over the deed to the bank rather than foreclose.

• Assumption: This option is where another qualified buyer assumes your mortgage and mortgage payments.

If you need help talking to your lender, housing counselors can help. Work with someone from the list of HUD approved Housing Counselors to avoid online scams.