Six Alternatives to Foreclosure

The foreclosure crisis has devastated the housing market, and the danger may not be over. By some estimates another four million households are in danger of facing a foreclosure action.

What started with the subprime fiasco is continuing because of stubborn unemployment. When homeowners lose their income, they have a hard time paying the mortgage. That's why it's important for homeowners who think they may face trouble in the future become proactive.

"Homeowners facing foreclosure are being bombarded with confusing and often opposing messages right now, but the meter has not stopped running," said Ethan Ewing, president of Bills.com, an online money resource. "It is imperative that that these individuals reach out to their lender now to avoid an unwelcome outcome later. The most dangerous thing a homeowner can do is nothing."

Modifications hard to come by

However, homeowners have heard that advice before. Unfortunately, as the dismal mortgage modification results suggest, most loan servicers are not that reluctant to foreclose, especially when the alternative is giving the homeowner a break. There are fees to be collected when a lender forecloses, and modifying a mortgage or accepting a short sale usually means taking a loss.

So, do struggling homeowners have any alternatives. Yes, there are six steps short of foreclosure that might be alternatives. However, it might not be easy to convince a lender to go along. Still, homeowners should try.

Forbearance: A temporary agreement with your lender that delays mortgage payments for a short time. Lenders are generally only willing to allow this avenue if you can prove that you will be able to restart your payments and bring your mortgage up to date. Terms can vary greatly by lender, so be sure you clearly understand the terms of your specific agreement.

Reinstatement: This occurs when you are behind on your mortgage payments and agree to a lump sum payment by a specific date that brings you current on your loan status. This is normally part of a forbearance agreement.

Repayment: This is a negotiated plan that allows you become current on your mortgage by making catch up payments over a fixed amount of time or by combining a portion of your overdue amount with your regular payments until you are current.

Loan Modification: This option has gained the most notoriety over the last few years because of government and non-profit programs that incorporate loan modification. In this course of action, the terms of your loan are adjusted - normally the amortization table or a lower interest rate - to sizably affect the amount of your regular payments. In practice, this alternative has been hard to achieve, either through banks' incompetence or willful obstruction.

Short Sale: If it is impossible to reach an agreement with your lender to maintain the mortgage, then a short sale can help avoid an actual foreclosure. In a short sale, your lender agrees to let you sell the property for less than it's worth and they will absorb the loss. This helps you avoid the stigma and credit damage of a foreclosure, while allowing the lender to recoup more money than in a foreclosure. As with other arrangements, terms can be radically different with each lender so be sure to understand the terms of your specific agreement. Again, lenders have not been exactly eager to agree to this.

Deed-in-Lieu of Foreclosure: This is a last resort option that essentially allows you to give your property back to the lender in return for canceling the mortgage. While this will hurt your credit score, the damage is less severe than a foreclosure.

Outside help

In many cases homeowners may need the help of a trusted and reputable third party to find the right alternative. However, homeowners should never turn to a foreclosure rescue firm which charges upfront fees and then does nothing.

"There are many legitimate foreclosure resources out there for homeowners who have tried to go it alone before or prefer not to negotiate directly with their lender," said Ewing. "But homeowners should avoid those who promise fast, advantageous settlements. Foreclosure settlements are usually difficult and complex - if it sounds too good to be true, then it probably is."