The best and most sensible way to avoid falling into default and having the lender foreclose on you is to make timely mortgage payments. Several steps can be taken to ensure your capability to pay your mortgage on time each month.

Strategies to employ to safeguard against default

 Purchase only what you can afford.
 Shop around for the best possible mortgage term and rates.
 Steer clear of non-traditional mortgage loans.
 Live within your means.
 Set up a financial budget and stick to it.
 Set up a rainy day fund for mortgage payments in case of a financial set back.
 Prepare for the unexpected and plan financial changes accordingly.
 Don't count on tomorrow's income. Realize that your income may stagnate while your debts increase.

What to do if a foreclosure occurs

Circumstances change constantly. The financial climate fluctuates almost as frequently as the weather. Unexpected medical costs, a death in the family, the loss of a job- all of these can negatively impact on the financial situation of a homeowner. Therefore, the worst possible event, a foreclosure, might occur.

A foreclosure will have a negative impact on your credit rating and have long reaching impact into your future borrowing ability. Avoid foreclosure at all costs, even if it means giving your home to the lender. Either way you lose your home, but with the second, you maintain some credit worthiness.

Borrow money from friends and family to catch up on your mortgage payments. Only do this if you intend to fully pay them back and believe that you will have the means to do so. Agree to a realistic date for repayment of the personal loan.

Contact a housing counseling agency that has been approved by HUD. In general, these agencies provide free counseling. Additionally, they might be able to offer government services or programs that can help you out of this situation. In some locations, they might be able to direct you to local community organizations that give assistance to homeowners in need.

Contact your lender immediately and respond to any correspondence that you have received from them. Explain your current financial situation, the immediate outlook of your finances, and your need to rearrange your payment schedule. Bring supporting documents with you when you speak to your lender. This will help to show your sincerity.

Lenders may often attempt to remedy the situation with a little creative financing rather than go through the process of a foreclosure. After all, the lender simply wants to have the loan repaid.

Possible remedies to the foreclosure

A mortgage modification happens when the lender changes the term of the loan by adding additional months or years to the mortgage. In turn, this will lower the monthly payments and prevent a foreclosure. Again, the borrower must be able to show evidence that he will be able to meet the new payments.

A special forbearance is a process in which the lender arranges a repayment plan that works within the borrower's current financial status. This might lead to a suspension of the monthly payments for a short time or at least a reduction in the expected amount. It is extremely important that financial documentation be provided that indicate the viability of this plan through the homeowner's ability to meet the new payment schedule.

A partial claim involves a one-time offer from the FHA-insurance fund that allows a one-time payment to get the homeowner's mortgage current. The homeowner will need to sign a promissory note in which a promise to repay the loan is made. A lien is placed upon the home for this additional amount of money

With mounting concerns by the Fed over rising inflation, there is a serious push to increase the current rates of interest. This may help to curb inflation, but will have a devastating effect for millions of homeowners tied to variable interest rate loans. As rates increase, so do most underlying mortgage payments, placing a greater stress on those who want, or need to sell property.

For these concerned homeowners, many are beginning to find themselves in an Ôupside downÕ sales position. In other words, decreasing home values in some areas of the country are already leaving owners in the dire position of owing more on their property than the current market price will bring. In addition, rising mortgage payments coupled with slower real estate sales, are forcing more owners into foreclosure, and in some cases bankruptcy, which is currently on the rise and heading toward one of the highest levels in U.S. history.

In an effort to curb this combination of economic pressures, and for saving equity wealth positions, many homeowners are now resorting to selling their property as a, For Sale By Owner. In doing so, they are saving large portions of equity profit that would otherwise be paid out as a real estate commission.

What many owners have discovered is that a 6% rate on a $200,000 home is in fact, $12,000. If their equity wealth position is $24,000 on their property, then they have effectively paid 50% of their profit to a real estate broker, not 6%! This financial inequity is created because the 6% commission is being charged on the gross price rather than on the net proceeds from the sale.

Add to this, the standard 2 1/2%-3% normal closing costs for each transaction, also calculated on the gross price, and again, a home ownerÕs wealth diminishes even further! To avoid this loss, a growing number of owners are opting to Ôdo it themselves.Õ Therefore, in an attempt to bolster this independent homeowner movement, the following five steps are being provided as a solid foundation in the For Sale By Owner process:

Step #1: Determine A Fair Market Price For The Property. This can be done by visiting a local Title Insurance Company and having them run price comparisons for ÔSOLDÕ property (over the past two years) within a 2-block radius. Using ÔsoldÕ prices in an immediate area will help establish a price/value range and trend a homeowner might effectively use for marketing their property.

Step #2: Connect With An Attorney and Escrow Office. One of the first connections to establish is with a qualified real estate attorney. This attorney will be used for helping guide the homeowner through the legal portion of the transaction and for finalizing any Offer To Purchase (also known as Earnest Money Agreement). The best place to start looking for a qualified real estate attorney is at the same Title Company used for researching the property value. Larger Title Companies usually have a full service escrow department for closing transactions. In addition, they can also provide a good alliance with some of the better, local real estate attorneys. By selecting the right Title Company in the initial research phase, it can prove to be a one-stop-shop for helping solve many home-selling challenges.

Step #3: Find A Mortgage Lender. Now that the attorney and escrow office are lined up, a good mortgage lender will be needed for helping to qualify purchasers and ultimately, for financing the transaction. My recommendation is that at least two conventional bank lenders, and one or two mortgage brokers are contacted for this purpose. The reason for having choices is that each lender will offer different financing packages. It is this loan diversification, which will open a wider range of financing opportunities when working with buyer pro

Your credit score is based on the perceived risk associated with extending you credit. Over the years, the credit reporting agencies have determined that a borrower who seeks credit from many different lenders is riskier than others. Therefore, they decrease your credit score each time a lender pulls your credit report.

Each time you call a lender seeking the best possible rate and terms for your home mortgage, he has to pull your credit report. This is factored into your credit score, and a lower score decreases your likelihood of getting the best rate and terms.

While some consumers are ONLY focused on rates, you should seek the guidance of a National Association of Responsible Loan Officers member that is willing to speak with you about your loan options. There are literally hundreds of loan products available and every borrower has a different financial situation and financial goal. We highly recommend having a consultation with your loan officer so they can tailor a program to meet your individual needs instead of focusing exclusively on rates and points. You may likely find a better product than the one you were shopping for.

MISTAKE #2: Trying to hide past financial difficulties

One of the important services a responsible loan officer offers is helping you overcome past financial difficulties that may hinder your ability to have your loan approved. Your loan officer is on your side.

Supply the information that will help your loan officer provide you with the best possible rate and terms and minimize the impact of your past credit history. The fact that you have recovered from past financial problems makes you a better risk than others who haven’t yet faced challenges. Overcoming past financial difficulty proves that you honor your commitments and don’t give up.

MISTAKE #3: Allowing a loan officer to put misleading or untruthful information about your income, expense or cash available for down payments on a loan application in order to get a loan

Providing untruthful information on a loan application is fraud. Mortgage fraud is prosecuted by federal authorities, and they will find out about the fraudulent information. Do not allow yourself to become an accomplice of a loan officer’s fraudulent loan application.

Even if a loan officer fills in the information for you, if you do not believe the loan application is 100% truthful, you should refuse to sign it until the loan officer corrects the application. While many loan officers try to "help" borrowers by misstating the facts, the truth is that they are simply getting themselves and their borrowers into a lot of trouble.

MISTAKE #4: Borrowing more than you can repay

All of us understand that we may have to stretch our monthly budgets a bit to afford the homes we want. However, you will put your entire financial health in jeopardy by buying a home you simply cannot afford.

If you buy an expensive home and find you cannot make the monthly payments, you could face a huge loss when you have to sell that home quickly to get out from under your mortgage. Or worse, you could be forced into foreclosure or bankruptcy.

It is much better to be patient, buy a home you can comfortably afford, make payments, build equity and then transition into a larger home after a couple of years. Yes, the larger home will cost more then, but the home you purchased will also have appreciated during that time. Most importantly, you will have built a successful financial foundation that allows you to experience all of your dreams, including that dream home.

MISTAKE #5: Relying on interest rate advertising

Some loan officers use interest rates to get your attention

• Establish some priorities for making a purchase. This should include things about the property that you want it to have.
• Take the time to inspect the properties prior to the sale dates. Evaluate the condition of each property. Take a notebook with you and jots things down. Even if you think you will remember different aspects of the properties, it is better not to take chances.
• If at all possible, request permission to inspect the documents that refer to the liens that are being held on the property. Find out if a lien exists for the property taxes since this lien might not be included with any other liens.
• Once you have returned to your office or home, review the particulars of each property. Determine what types of repairs are needed on each property in order to make it habitable. Determine if there is any potential for profit that you might realize with each property. Determine what level of profit is possible by evaluating the amount of debt on each versus the current estimated market value.
• Compare and evaluate your available options for properties. Create a chart that displays the information together for ease of comparison.
• Narrow your potential selections down to two or three choices according to your pre-determined priorities. For example, you might want to exclude properties with less than a 30% profit margin, specific neighborhoods, or specific types of construction.
• Now it is time to select the property that matches your criterion the closest.

Obviously, this strategy might not work for everyone. Tweak the parameters to suit your particular situation. The most important strategy to employ is to determine your reason for making the purchase. If the pre-foreclosure, foreclosure, or REO property in question does not meet this guideline, move on and consider a different property.

Article Written By: Susan M. Keenan ©2008

In fact, it is essential to research what to expect during a foreclosure sale in the particular state where the property is located. Each state has its own set of guidelines when it comes to the sale of pre-foreclosure or foreclosure property. A brief explanation is given below for the most commonly used terms during this type of real estate transaction.

* Deed of trust- A deed of trust is a legal document that is given as security for the repayment of a loan taken out on a piece of property.
* Co-owner- A co-owner is an individual who has a legal claim on the piece of property in question in addition to the primary owner of the property. It is possible to have more than one co-owner.
* Lien- A lien is a legal claim against a piece of real estate or property that is held by a lender for repayment of a debt incurred by the purchaser of the property.
* Junior lien- A junior lien is a debt that has been assessed against a property or piece of real estate. It does not have the priority standing against the home’s equity.
* Senior lien- A senior lien is a debt that has been assessed against the property or piece of real estate that takes the priority status over all other liens held against the property for repayment.
* Distressed Home- A distressed home usually involves several major repairs rather than minor cosmetic ones. Many individuals commonly refer to any foreclosure property as a distressed home.
* Fixer upper- A fixer upper refers to the type of home that is in need of repairs that are only cosmetic or minor in nature.These repairs are appearance related and are usually not immediately necessary. However, when this type of repair is completed, it would improve the livability or comfort of the home.
* Pre-foreclosure property- A pre-foreclosure property that has not yet been taken over by the lender or bank. It involves a property that has been foreclosed on. It has also been scheduled for auction to satisfy its debts. However, it has not yet met its scheduled auction date.
* Foreclosure property- A foreclosure property is one in which the bank or lender has taken possession of the property or piece of real estate. It is in default. The lender or bank has taken possession in order to sell the property and satisfy the owner’s remaining debt on the property.
* REO property- REO is the term used to refer to ‘real estate owned’ properties. Typically, the bank or lender who held the senior lien on the piece of real estate or property now owns the property.

If you are new to the world of real estate sales, consider taking a course to assist you in understanding the ins and outs of real estate transactions. Additionally, you could hire the services of a lawyer or go through a real estate agent.

Whatever it is called, there seems to be a vicious cycle spiraling down to disaster. Homeowners have given up, and some foreclosed homes are on the market at prices that would have been a great bargain five years ago. Individuals in dire straits cannot sell their homes and face foreclosure if they cannot unload the property in a market filled with homes that have been placed on the market by lenders that want to unload them. Unfortunately, other homeowners who might buy these bargains cannot sell their homes because it is suddenly difficult to get a mortgage. Homeowners also have trouble selling their homes unless they agree to bargain basement prices. Other homeowners find themselves living in homes that are not worth the mortgage that secures them.

Help is available for those caught in parts of the vicious cycle, and a short sale is a possibility for some homeowners looking to avoid disaster. Lenders are a diverse group so anyone looking for hardship assistance should immediately contact their lender to ask for help. A short sale might be a good option for the lender and the homeowner. The lenders have already foreclosed on many properties. Most of these companies do not want more foreclosures, and they do not really want to deal with selling the property.

In general, the basic process for a short sale works like this. The lender agrees to accept the fair market value of the property rather than the amount owed on the loan as a settlement. The homeowner sells the property at the agreed price. The homeowner provides the proceeds to the lender as the settlement. The credit rating of the homeowner will not be affected by the short sale.

A short sale deal usually takes about sixty days from start to finish depending on the local market. The appraisal process often takes about two weeks to determine and agree on the fair market value. The approval of this amount by all the parties involved takes approximately two to five days. Closing escrow usually takes from two to four weeks and the deal is done.

The homeowner should avoid a negative impact on their credit rating by the short sale, but there may be tax implications. All homeowners should discuss the entire process and agreement with a tax professional before initiating short sale negotiations.

START WITH THE PEOPLE WHO REALLY CARE

Millions of homeowners have loans that are guaranteed by FHA or VA. FHA became part of the Department of Housing and Urban Development (HUD) in 1965. If you are not sure whether you have a guaranteed loan program, check the folder you received from your title company when you purchased your home or ask a realtor to look at the papers. Even if your mortgage is not guaranteed, HUD, FHA, and VA resources have housing counseling agencies, legitimate refinancing agencies who do not engage in unlawful predatory lending practices, debt relief scams, and information about consumer rights for lending. You may even be eligible for relief from natural disasters or if you are or your spouse is active duty military.

In addition to contacting your mortgage lender, please contact a HUD Counselor or the FHA or the VA as soon as you know you are in trouble. Don't wait until the bank contacts them with threats of foreclosure - you might save the $4000 we were charged in extra interest and penalties while waiting for our bank to help.

CRY ME A RIVER

Here is my experience with loss mitigation - in the end, I realized all the bank cared about was the extra money they could make off me while trying to settle. I hope the resources provided in this article will save you from paying thousands of dollars of extra interest and penalties while trying to catch up on payments. In our case, we had a business that got in trouble when a supplier went bankrupt. We tried for two years to save it - we borrowed money from relatives, we got small bank loans, and we wrote all our creditors to ask for temporary relief. My husband found a job to help cover our personal expenses and keep from going under while I continued to work at the business. It was the American Dream gone bad! We had no legal recourse against the supplier while the bankruptcy courts were sorting out their reorganization. What we did have was legal responsibility to maintain regulatory requirements and maintenance of THEIR equipment located on our property. After three years, their bankruptcy was still in the courts, our bank accounts were sucked dry, we borrowed all we could, and we were in trouble!

IF YOU WASTE YOUR TIME, THEY WILL WASTE YOUR MONEY

I began writing my home mortgage company 6 months prior to missing any payments. I explained the financial difficulties we were having and pleaded for reduced interest rates, interest-only payments, refinancing, an equity loan, or any option that would help us from losing our home until we could get back on our feet. After three months of no response, we decided to sell our house and rent to help get out from under all the expenses of home maintenance, insurance, and high utility bills. I wrote again explaining that we were selling our home and asked for help until we could sell.

Here are some obstacles we faced with the very large national bank that bought our mortgage note (they were not the original lender):

·
Nobody responded to my phone calls, emails, or certified letters until we missed 3 mortgage payments - but they continued to add hundreds of dollars of interest and penalties each month.
·
When they did call us - we asked where to send a partial payment that we had saved. We were told that it was against the bank policy to accept partial payments - but they continued to add penalties and extra interest on the unpaid balance.
·
The loss mitigation representative wanted us to short sell our house - they would send an appraiser right over. She said this would stop foreclosure. Good for the bank - bad for us: if we short sold for less than we owed, we would owe the difference to the VA and I would lose any further VA home loan benefit for defaultin

* The debt must be collateralized by the property to be sold.
* The debt must be in default. This means payments are not up to date.
* The creditor must fulfill the legal requirements of the state where the property is located.

Contrary to common homeowner belief, the bank does not own the home. Unlike an auto or boat loan (where the bank's name is on the title), real estate is owned by the borrower. The property is collateral to the loan. "Foreclosure" is not "repossession". Foreclosure does not happen immediately after an owner is late on the mortgage payment. The foreclosing creditor must take specific legal steps. Each state has different laws governing the foreclosure process.

Foreclosure is the culminating event of a legal process. This is the foreclosure process. A property is not foreclosed until it is sold at auction in accordance with the state's foreclosure process. That "the lender is foreclosing" or that a "property is in foreclosure" really means that the lender has initiated and is proceeding through the legal process to foreclose a property.

Typically, as soon as there is a default, the lender initiates a collection process. This is known as the collections period. This is the best moment for a homeowner in default to reinstate and bring the payments up to date. The length of this collections period varies with each lender. However, generally speaking, if after three months the homeowner has not resolved the situation, the lender takes more drastic steps.

The foreclosure process starts if the creditor fails to collect. The foreclosure process always starts with a legal notice to the owner stating that if the loan is not paid or reinstated within a period of time, the property will be sold at auction in order to pay the debt. This period is known as pre-foreclosure. The length of the pre-foreclosure stage depends on the state's law. The owner has until the foreclosure date to resolve the default. Solutions for resolving the default range from reinstatement (bringing the loan current by catching up on past due payments), refinancing, paying off the debt in full, or the selling the property to another party in order to satisfy the debt. If none of the above happens by the auction date, the property will be sold to the highest bidder. Foreclosure is a short and specific event. The proceeds from the debt are used to pay the creditors. Anything left belongs to the owner of the foreclosed property.

Troublesome foreclosures happen when properties are over-mortgaged. In other words, the amount of money owed exceeds the value of the property. In these situations, the only way for the property owner to get out of debt (other than paying the debt) is for a short sale to happen prior to foreclosure.

Over-mortgaged properties are common. This usually occurs when second, third and sometimes fourth mortgages are taken out on a property. Liens are another reason. 100% financing is another source of this problem. 100% financed properties rapidly become over-mortgaged if there is a default, because if the owner stops paying, the debt on the property will usually increase faster than the property's appreciation. In addition, once the owner is in default, usually taxes, homeowner association fees and even utilities get neglected. Furthermore, and very commonly, maintenance is deferred and the property quickly starts becoming less valuable.

Sometimes accumulated debt can exceed 130% of the property value. In a pre-foreclosure situation, these secondary mortgages are at the mercy of the lender who is in first position. They worry about the chances of recovering their money if the first mortgage holder forecloses and the property sells at the auction for a low amount. The subordinate lenders

Others view it as a business transaction with this outcome being a risk the lender assumed volitionally and with great profit motive. A rational case can be made for either side of this argument, and in the end moral judgment devolves to the individual.

Ethics aside, many want to know the hard facts surrounding the benefits and ramifications of turning over the keys to your lender. The most obvious benefit is escape from an oppressive mortgage payment. If you were easily able to service the payment, then you wouldn't be considering this measure. Today, most likely a high payment arose from an adjustable rate. You could afford the initial payment, but now it is just too much. Unable to sell your house for anywhere near the current mortgage balance you feel stuck. Walking away it is often possible to rent a comparable property to the one you are leaving at a fraction of the cost.

The aversion to renting becomes much more palatable seeing your current ownership situation is not resulting in any equity either. If anything, it is the opposite if you are in a declining market. It can be very possible you are paying a mortgage each month while the amount of your equity plummets. Some markets may not see the valuations attained at the peak of the housing heyday again during our lifetimes. In this scenario, the equity which home ownership represents becomes illusory. Add to that the burden of rising local property taxes and the prospect of walking away can become even more alluring.

Even more appealing is the prospect of getting to keep your house and have the mortgage erased. This is a long shot, but it can happen. Many lenders are having difficulty satisfying the court's demand for full chain of title. This relates to the complex CMO arrangements in which many mortgages now reside. There is a story of a gentlemen in Florida with a very expensive house who has avoided foreclosure for over a year by just showing up in court and contesting chain of title. Again, morality aside, many of those in desperate straits today will employ
any option, if only to obtain months of free rent.

With the benefits being clear for getting a large monkey off your back, what are the ramifications? The first obvious one is credit. Mortgage defaults wreak havoc on your FICO score, and you must be prepared for the adverse credit consequences. One should assume a ten year horizon and sit down and calculate all credit needs during that timeframe.

How many cars will you own or lease? Buying another home could prove difficult, however coming out of your current situation it might be better to be a renter and fully recover before diving back into home ownership. Between vehicles, credit cards, and other potential sources of credit, how much additional will it cost you over the next ten years via higher interest rates? This mathematical calculation can be compared against your savings accrued by walking away to put in perspective the economic balance sheet.

One potential ramification to consider is what is termed a deficiency balance. Assume you have a mortgage balance of $300,000 and you walk away. Your lender forecloses on the property and only receives $200,000 net all the various costs. Theoretically, they could pursue you for the additional $100,000 they are out. Practically, this has not happened on a widespread basis. As indicated, many lenders are having trouble enough just obtaining judgment on the foreclosure itself. Obtaining a deficiency judgment is even more difficult. However, it is possible. Your exposure to a deficiency judgment varies by state.

If you are facing this decision, it might prove wise to get basic information about mortgage deficiency pursuit in your locality. Often, there are free legal resources through local law schools or community programs where you c

If you are one of those that earn cash on a daily basis, you should always set aside a portion of your cash to pay for your home amortization so that you can avoid foreclosure. For example, let's say your monthly amortization payment is around $500 dollars per month. Now divide that amount according to the numbers of days you work. If you work 20 days a month, this means you will need to put aside $25 per day. If you're married, you and your spouse can split up the daily saving quota, thus making it even easier.

In the event that you have an emergency, try not to use the money that you have set aside for the house amortization. Do your best to find other means of generating money to help you out of your emergency situation. This will take an extreme amount of discipline. But this is the only way that you can avoid foreclosure. The bottom line is, avoiding foreclosure requires a tremendous amount of discipline. The discipline to live below one's means it is a good starting point. Without discipline, one can find them on the street in very short order.