How to Avoid Foreclosure and Save Your Home

It has been all over the news -- foreclosures are on the rise. According to the Mortgage Bankers Association, more than 2.1 million Americans missed at least one mortgage payment in 2006. This year, experts predict an increase in mortgage foreclosures to the tune of 33 percent more than in 2006 (based on a report by RealtyTrac). While there is no silver bullet, there are some things you can do to avoid foreclosure and to save your home.

What is Foreclosure?

Foreclosure is the legal process by which your mortgage lender can repossess your home. Essentially, if you stop making mortgage payments, the bank can initiate a process to take back your home which usually involves the forced sale of the property at a public auction, with the proceeds of the sale being applied to the outstanding mortgage debt.

Typically, the entire process takes about one year to complete -- from the initial determination by the lender to the sale of your home.

Why Foreclosure Is Your Absolute Last Resort

When your house is foreclosed upon, you not only lose your home but you leave lasting scars on your credit report. In fact, a foreclosure can stay on your credit report for between seven to 10 years, making it very difficult, if not impossible, to buy a new home, shop for a car or borrow any money.

If You Hit a Financial Crisis and Can't Cover Your Mortgage

While your instinct may be to avoid opening the mail and letting your phone calls go to voice mail, the absolute last thing you want to do is put your head in the sand and ignore the warning signs. Instead, you should contact your lender as soon as you realize that you are not going to be able to make a payment, as most lenders prefer to help borrowers get back on track rather than having to go through the process of foreclosure. It typically costs a lender more than $40,000 to foreclose on a home, so for a lender, it, too, is their last resort.

There are different strategies available, depending on whether you are trying to save your home or merely rid yourself of the mortgage obligation without having to foreclose. If you think you can get back on track with your mortgage payments, you should consider:

1. Working with the lender to modify your loan. Based on your income and what you can realistically pay, the lender may work with you to change the terms of the mortgage -- such as extending the fixed period of an ARM or even lowering your interest rate -- to reduce the amount that you are paying each month.

2. Signing a formal repayment plan with your lender. If your financial troubles are the result of a serious illness or major hardship (that are not likely to be repeated), a lender may allow you to sign a repayment plan whereby you agree to bring your loan payments up to date within 18 months.

3. Asking your lender for a forbearance agreement. Basically, this is for the homeowner who had major damage to their home because of a natural disaster (Hurricane Katrina and its aftermath in New Orleans). The lender will reduce or suspend the payments for a specific period of time -- typically, no more than three months to allow you to catch-up and get your life back in order. The suspended payments are then tacked on to the back of the loan.

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