By:  LINDSEY O’NEILL, ESQ.

 Are you facing foreclosure?  If so, I can certainly understand what a difficult and stressful situation you are in.  Sadly, a lot of people are in the same boat.  People ask me all the time, “What can I do to avoid foreclosure?” Sometimes, it may seem inevitable.  However, lenders are in the banking business…. not in the business of selling real estate.  They don’t want to take your house if there is an alternative.  And you certainly don’t want to go into foreclosure if you can prevent it since it will greatly affect your credit and ability to take out a loan when you need one.  Thankfully, there are some things you can do if you are facing foreclosure. 

First:  Don’t avoid your lender.  Talk to them as soon as you start having trouble making your mortgage payments.  Call or write to your lender’s Loss Mitigation Department to explain your situation. They will ask you for your financial information, such as income and expenses, and the reasons underlying your inability to pay.  If your situation is temporary, and you anticipate your income to increase, or your expenses to decrease, and you are confident you can resume your mortgage payments at a certain time, then the Loss Mitigation Department may be more likely to work out an arrangement with you. 

Secondly:    Contact a HUD-approved housing counseling agency. (1-800-569-4287 or TDD 1-800-877-8339.) These agencies are can help you find out about programs offered by Government agencies, or private and community organizations, that could help you. They may also be able to give you some credit counseling.

Third:  Explore foreclosure alternatives allowing you to keep your home.   You may qualify for a special forebearance of your mortgage payments.  You may either be able to pay a reduced mortgage payment, or suspend your payments altogether, on a temporary basis.  In this case, your lender will work out a repayment plan with you where you would repay the portion owed either in lump sum at a certain time in the future, or gradually over time.  You may also qualify for mortgage modification and refinance your loan with different terms (either a reduced interest rate or an extended loan term) so that your payments are more manageable.   Also, if you have FHA Insurance,  your lender may be able to get the insurance fund to basically give you an interest free loan to bring your account current, which you will be obligated to repay when you sell the home or pay off the mortgage.

Fourth:  Sell your home.  You may be able to sell your home before it goes into foreclosure.  Sometimes, the bank will accept the sale amount, even if it is less than what you owe on the mortgage, in a pre-foreclosure sale, sometimes referred to as a “short sale.”  If not, the lender may be able to get a deficiency judgment, which would obligate you to pay the “deficient” amount you still owe the bank.  Some states allow lenders to sue you for the deficiency and some do not. 

Fifth:  Give the bank your home.  This is a last resort, and sometimes not even available.  However, if you qualify, sometimes a bank will allow you to “give back” your property – called a deed-in-lieu of foreclosure.  A deed-in-lieu of foreclosure is not as damaging to your credit as a foreclosure. 

Note that in short-sale and deed-in-lieu of foreclosure situations, the amount of the ”forgiven debt” may have tax consequences as well, depending on your situation.  Forgiven debt is usually considered to be taxable income by the IRS.  However, there are a variety of options for relieving yourself of liability for the forgiven debt.  For instance, under the Mortgage Forgiveness Debt Relief Act, while you still have to report the forgiven debt on your personal residence to the IRS, it may be excluded for purposes of tax liability.   Also, you may not have to pay taxes on the forgiven debt if you are considered “insolvent.”  Learn more about cancellation of debt income and tax liability from the IRS.  

Need more resources? The U.S. Department of Housing and Urban Development published an informative guide, How To Avoid Foreclosure, which provides valuable information about what happens when you miss your mortgage payments and how to talk to your lender about a default.  Alternatives to foreclosure are also discussed including mortgage modification and deed-in-lieu of foreclosure to help consumers avoid loosing their homes. Also read HUD’s Tips for Avoiding Foreclosure.