When foreclosure threatens, the very worst thing to do is to ignore any warning letters from your lender. The process takes some time, so burying one's head in the sand may produce a misleading relief that nothing seems to be happening. But legal expenses are mounting up and precious time is being lost, for if prompt action is taken, there are sometimes things one can do to head off the disastrous loss of a home to foreclosure.

When it comes to applying for another mortgage loan, some time in the future when your finances have cleared up, a foreclosure on your record would be worse than a bankruptcy. In many cases, it means you'll never qualify for a mortgage loan again.

In addition, in some states and with some types of mortgages, you could be hit with a deficiency judgment, sued for the shortfall if a foreclosure sale doesn't bring enough to clear the debt, back payments and legal costs.

So it's well worth trying every route to avoid foreclosure.

First step is to confer with your lender as soon as a problem threatens. Sometimes they have suggestions, because banks don't like to foreclose. It usually ends up costing them money.

In some cases, HUD will take over an FHA mortgage for as long as a year ("forbearance"), giving the beleaguered borrower a chance to recover and get back on track. The VA has similar opportunities, offered on a case by case basis that takes your whole financial situation into consideration.

Occasionally, when your financial situation warrants it, the lender will re-cast your loan for a longer period and/or lower interest rate, making payments more affordable.

Sometimes a lender will agree to a "short sale", settling the debt for whatever the property will bring on the open market. (The IRS, however, looks on "forgiveness of a debt" as income, and you may owe tax on the amount that was discounted.)

If your home is worth more than the amount owed, the best route may be to put it on the market immediately, at a bargain price for a quick sale. Your lawyer, broker or counselor may be able to negotiate a halt to the foreclosure process in the meantime. Yes, you'll be out of your home, but your credit record won't suffer.

In most communities, non-profit agencies handle mortgage counseling and may be able to intervene for you. It's not necessary to pay as much as $1,800 to commercial services that want upfront payment (though if you had the extra cash you wouldn't be in this fix in the first place) but won't guarantee results.

To reach a non-profit agency near you, call Consumer Credit Counseling at 1-800-388-CCCS. They'll give you the phone number of a local office, which either handles mortgage counseling, or will direct you to a local non-profit housing bureau that does.

Published: May 6, 1999

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