Foreclosure is bad for both the lender and the borrower. The homeowner loses his or her house, and the lender loses anywhere from 20 to 60 cents on the dollar [source: FDIC]. This is important to remember if you fall behind on your loan. The single most important step you can take to avoid foreclosure is to communicate with your lender. Most people are scared and embarrassed to the point that they ignore calls and letters from their lender. This is human nature, but it's the worst thing you can do if you want to hang on to your home.
Many lenders will work with you to avoid the foreclosure process. They will deal with your case on a personal level, and your circumstances will be taken into account. If you only fall one or two payments behind, the mortgage holder will mail you a loan workout package that will help you catch up with your loan. The package consists of information, instructions and forms regarding your ability to make payments.
If your situation is temporary, there are some other solutions:
- The Federal Housing Authority (FHA) is willing to help. If your loan is FHA-approved, you can get in touch with an FHA housing counselor who will walk you through possible solutions. This counselor will negotiate with the lender for you and will even help you work out a monthly budget plan.
- If the area where you live or work has been declared a natural disaster by the federal government and you're facing foreclosure, the FHA provides relief plans to assist you. In most cases, you can get up to three months' relief from your monthly loan payments while you work out your home or work situation.
- Forbearance is when your lender agrees to suspend your payments temporarily if you agree to another option to satisfy your loan amount. The option is usually reinstatement -- you pay the outstanding amount in one lump sum. If you know you have a large amount of money coming your way soon, these options are good ways to prevent foreclosure.
- Mortgage modification is when your lender agrees to change the terms of your mortgage to make it more affordable for you.
- You may be eligible for a partial claim if you're able to begin making payments again but not able to bring your account current. Your lender would assist you in getting an interest-free loan that will bring your account current and you can resume payments. Payment on this loan can be delayed for a period of time.
- If you aren't able to keep your home, you can sell it to pay off your loan. If this is the case, call your lender -- it can suspend your loan payments while you sell your house and may even accept less than the loan amount if you sell it quickly. A final option is to surrender your deed-in-lieu of foreclosure. This is when you simply hand your property back to your lender.
In the next section, we'll look at some of the effects foreclosure can have on you and your community.
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