Avoiding Foreclosure: Even with Bad Credit

By Meiling Hunter
Mortgage Credit Problems Columnist

Over 900,000 -- or 2.04% -- U.S. households are in the foreclosure process.  This figure is up 71% from a year ago, according to a survey conducted by the Mortgage Bankers Association. If you feel that you are at risk of foreclosure -- even if you have bad credit -- you may be able to save your home.

Don't Make Your Bad Credit Worse

Your mortgage and home equity loans may be costing more than you can pay. The worst thing you can do when foreclosure seems inevitable is to avoid communication with your lender. Believe it or not, your lender doesn't want to worsen your already bad credit and take your home and equity away from you. Your lender has an arsenal of options for you and your family to avoid foreclosure, but it's up to you to be proactive and make the call. Here are some options that your lender may discuss with you:

• Special Forbearance- Your lender may be able to arrange a repayment schedule to accommodate your financial situation. If you have lost your job or experience a sudden increase in living expenses your lender may provide reduce or temporarily suspend payments.
• Mortgage Modification- You may be able to refinance your home and/or extend the life of your loan. This can help you get caught up on your home loan payments by making them more affordable.
• Partial Claim- If you have an FHA loan, you may qualify for an interest-free loan from HUD to bring your home loan current. In order to qualify, your loan must between 4 and 12 months delinquent and you must have resolved your financial problems and be able to make the full mortgage payments.
• Pre-foreclosure Sale- This will allow you to sell your home and pay off your home loan to avoid foreclosure and damaging your credit. It may involve selling your home for less than you owe, with the approval of your lender. This is referred to as a "short sale."
• Deed in Lieu of Foreclosure- If all else fails you may be able to voluntarily "give back" your home to your lender before it starts foreclosure proceedings. While no lender is thrilled about doing this it is a less costly process when foreclosure is inevitable. And it is less damaging to your credit than a foreclosure. Keep in mind that if there are any junior liens on the property, like home equity loans) you aren't relieved of that obligation by returning the home to the holder of your first mortgage.
  

Lastly, don't become a victim of scams -- it's best to avoid any service promising to help you out of your foreclosure problems; communication with your lender is a better solution. If you are ever unsure or confused about your options, contact a free or low-cost HUD-approved counselor for advice.

Sources:
HUD
CNN Money

About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.

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