A beautiful home - complete with loving family and wonderful memories - is part of the American Dream. A major part of many peoples' lives is spent turning a home into a dream home. But just because you manage to attain the home of your dreams doesn't mean it will be smooth sailing from there on. Your dream home may entail big mortgage payments, which, in a crisis, could put you at risk of foreclosure.

If your home is at risk of foreclosure, the problem must be tackled at once and with the utmost care - one wrong move could spell disaster. However, by taking the proper steps, this disaster can often be averted. (For related reading, see Are You Living Too Close To The Edge?)

Foreclosure Avoidance Tactics
If your home is at risk of foreclosure, don't start packing - take action! Some of the steps you can take to save your house include:

Reinstatement
When you are behind in your mortgage payments, reinstatement lets you to pay back the amount in lump sum payment (which may include any interest and penalty charges) before a specific date.

Short Refinance
In a short refinance, the lender may agree to forgive some part of your debt and refinance the remaining debt into an entirely new loan.

Special Forbearance
Sometimes, a short-term financial hitch like medical emergency or a decrease in income may not allow you to make mortgage payments on time. If your lender believes that you have a valid reason behind the missed payments, it may be agree to help you out with a special forbearance.

Depending on your financial circumstances, your lender may consent to a repayment in which you will temporarily owe lower payments; you may also get an interim suspension of payments. However, in order to secure this agreement, you will have to assure your lender that you will resolutely abide by the new repayment plan.

Mortgage Modification
Loan modification allows you to refinance your mortgage loan or even extend the term of your loan. The lender may settle for monthly mortgage payments that are within your financial means. However, to qualify for this alternative, you need to persuade your lender that your monetary problems are only temporary and will soon be resolved.

Refinance with a "Hard Money" Loan
Sometimes your lender may refuse to refinance your loan if it considers you as a high-risk borrower. In this case, you can contact a private lender to refinance with a hard money loan. Hard money loans generally have astronomical interest rates and fees, but it could allow you to buy the time you need to avoid foreclosure.

These foreclosure options should be easily available to anyone with a government-backed loan provider and built-in mortgage insurance, such as in an FHA loan.

When Foreclosure is Inevitable
If your situation makes foreclosure unavoidable, here are some tactics you can use to dampen the financial blow.

Pre-Foreclosure Sale
If you are absolutely convinced about your deteriorating finances, then the only option left for you is to sell your home for less than the amount required to pay the mortgage loan. You may be eligible for this alternative only if you default in your mortgage payments by a few months, or as specified by your lender. In addition, you may be required to sell your home in a specific amount of time. (For related reading, see Downsize Your Home To Downsize Expenses.)

If you can't bear to move out, you could sell your house to a friend or an investor who will then lease the home to you. The best way to do this is to sign a lease (or contract) that includes an "option to purchase" clause, which gives you the right to buy back your home once your finances have improved. However, this alternative does have significant risks, as sometimes the investor can borrow against your property or may even sell your home without your authorization.

Deed in Lieu of Foreclosure
Another way out is to willingly give your property to the lender, in which case the lender will pardon your debt. You will qualify for a deed in lieu of foreclosure only if you are unable to sell your home before foreclosure. The only advantage of this option is that you are rescued from a foreclosure as well as a bad credit record. (For more insight, see Consumer Credit Report: What's On It.)

Bankruptcy
Many people believe that filing for bankruptcy is a nice solution to foreclosure. In reality, all bankruptcy can do is delay the foreclosure process and buy you some time to catch up on your payments. Once the bankruptcy-instated suspension is revoked, the lender may ask for a full payment, which may require that you apply for a refinancing loan. However, the chances of getting a refinance loan are almost zero at this point, because the bankruptcy declaration will have left you with a negative credit score. (For related reading, see Bankruptcy Protection For Your Accounts.)

Conclusion
Avoiding foreclosure is easy if you stay away from situations that cause it. Excessive debt, adjustable-rate or exotic mortgages, a lack of emergency resources, lack of insurance and even buying costly homes will increase a homeowner's risk of foreclosure. Occasionally, financial setbacks can get in the way of making regular mortgage payments. When this happens, the only wise thing to do is to immediately inform your lender about this delay. In most cases, your lender will be willing to cooperate with you and help you catch up. Often, lenders are not interested in foreclosing your house except as a last resort because of the costs and time involved in the process.

As a homeowner, it is up to you to take all the necessary steps to save your house from foreclosure.

To read more on this topic, see Avoiding Foreclosure Scams. For a one-stop shop on subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.

Related Articles
  1. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  2. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  3. Credit & Loans

    5 Signs a Reverse Mortgage Is a Good Idea

    If these five criteria describe your situation, a reverse mortgage might be a good idea for you.
  4. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  5. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  6. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  7. Credit & Loans

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  8. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  9. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  10. Home & Auto

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Theta

    A measure of the rate of decline in the value of an option due ...
  5. Equity

    The value of an asset less the value of all liabilities on that ...
  6. Derivative

    A security with a price that is dependent upon or derived from ...
RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!