Foreclosure solutions: how to avoid foreclosure

With the housing market still in a bust, there are plenty of people that haven’t been able to make their payments. If you’ve fallen behind on your mortgage payments – or think you might – don’t automatically jump to the foreclosure square on the board – you might be able to still pass go and collect $200. Foreclosure isn’t the only answer in times of financial hardship. Below are a few options to think about. But before you take any further steps, first speak with your lender about your options.

Traditional or HARP refinance

If your mortgage payments are high and you’re looking for lower mortgage rates, you might want to consider a traditional or HARP refinance. As of Jan. 19, 2012, Freddie Mac put the average 15 and 30-year fixed mortgage rates below 4 percent – that can add up to a lot of savings in interest over a period of time.

For a traditional refinance, you’ll need to show that you have plenty of equity in your home – at least 20 percent or more to avoid mortgage insurance – haven’t missed any mortgage payments and have better-than-average credit.

The Home Affordable Refinance Program, HARP, is for you if you currently have a Freddie Mac or Fannie Mae loan, don’t have much – or any – equity in your home and can actually afford the new loan payments.

In any case, mortgage rates are low, so now might be the time to look into refinancing.

Forbearance

Some lenders will actually briefly reduce or suspend your mortgage payments for a set period of time if you’re facing a financial hardship. Granted, forbearance isn’t for the long-term. It’s more of a get-out-of jail-free pass until you find your financial footing again. Consider asking your lender about this option, if your financial suffering is short-term, and if you think that you might miss a payment — or already have.

Generally, your lender will combine forbearance with a repayment or reinstatement plan. These plans usually come with fees or late payments, but it’s a better option than completely defaulting on your loan.

Traditional or HAMP Modification

If you’re already well behind on your payments, or believe that you might be behind soon, modification might be for you. A modification comes in the form of an arrangement with your mortgage company that changes some of the original terms of the agreement — often mortgage rates or the loan term.

The Home Affordable Modification Program, HAMP, is your go-to solution if you have a Freddie Mac or Fannie Mae loan, took out your mortgage before Jan. 1, 2009, don’t qualify for HARP and spend more than 31 percent of your pre-tax income on your mortgage. You also need to be the primary resident of the property.