Can't Pay Your Mortgage? Tips for Avoiding Foreclosure

As a former real estate professional, I have dealt with buyers and sellers in all stages of the process. One of the hardest things for any homeowner to deal with is the mental and emotional strain of having payments that they can no longer afford. In general, if you're a homeowner who is only slightly behind on your payments, one of the best approaches is to contact your lending institution, explain the situation, and see about getting onto a reduced payment plan that will meet your current income level. The government has recently instituted special financial assistance schemes available for homeowners through lenders specifically designed to assist those facing foreclosure.

If you are a couple of payments behind or more, however, have lost your job, and have little or no income every month, you may very well have to face the fact that losing your home is indeed a possibility. In today's economic climate, lenders are cutting their losses more quickly. Whereas it used to take six or seven months before a lender would start traditional foreclosure proceedings, some lending institutions are beginning the process as soon as two or three months after the homeowner starts to get behind on their payments, and have accelerated their internal timeline, in order to take bad assets off the books sooner.

It is thus essential to remain in contact with your lender and work on mitigation and contingency plans. One solution is to actively list your house with a real estate professional in order to get a quick sale. Many people, however, are underwater on their mortgage -- i.e., their total debt from a primary and/or secondary mortgage is more than what their house would fetch on the open market. If that is the case, a homeowner might consider short selling their house.

What is a short sale? A short sale is basically a process by which a lender agrees to take a smaller payoff from the sale of one's house than is owed on the total mortgage amount. In order to qualify, seller needs to provide a few things: 1) a hardship letter from the homeowner stating the nature of hardship and the reason that they cannot pay their debts; 2) a household asset and budget accounting, which indicates that there are no reserves or other sources of income that a homeowner could use to pay the mortgage; 3) the seller needs to be behind on their payments; and 4) if at all possible, the seller should have an offer in hand from a buyer to purchase the property at whatever sales price they are able to attain on the open market.

In many cases, a mortgage company is willing to sell the house under the mortgage value rather than let it slide into foreclosure proceedings, as it knows the foreclosure process may very well be more expensive than writing down perhaps $10,000-$20,000 of the mortgage balance in order to effect a short sale. The mortgage company would rather take a reduced payment than have another asset go back onto its books as a real estate owned (.i.e. REO, or foreclosed) property.

While your credit rating will be affected either way, it is much better to restructure your payments or short sell your house than it is to have a foreclosure on your credit report. And the time it takes to repair damaged credit from one of the former options is much sooner than that for foreclosure - which, unlike bankruptcy, stays on your credit report forever after.

If you are under a mountain of debt and cannot pay for your home, but would like to remain in the house and look at restructuring options based on potential future income, initiating bankruptcy proceedings may be a viable option. These generally only cost a few hundred dollars in attorney fees, and can allow you valuable time in which to work on digging yourself out of debt and rebuilding your life, without losing the home in which you live.

In all cases, most states offer free credit counseling for anyone who requires it. Simply look in the phone book or search online for free or nonprofit credit counseling organizations and contact them for assistance. It is best to do that before you get much further in debt, because a good credit counseling service can assist you in consolidating payments and working with banks, credit card companies, and other lending institutions in restructuring your existing debt into something manageable - instead of working on damage control after the fact. You can also find real estate professionals that have experience with short sales and dealing with lending institutions to assist you as required. In most real estate offices, the broker for that office will be able to refer you to someone who specializes in that for their agency.

Above all, don't lose hope -- and explore your options sooner rather than later. You'll be glad you did.