Ways to Avoid Foreclosure
There are several ways to avoid foreclosure, each with its own qualifications. The preferable solution depends on the homeowner's goals and situation.
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Refinancing
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Because refinancing entails a new mortgage, closing costs and the usual documentation (appraisal, credit check, income verification) are required. Refinancing is rarely offered if the homeowner is more than one month behind in payments.
Loan Modification
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Loan modifications also lower payments. A hardship (a medical crisis or temporary income loss, for example) is required to demonstrate that the homeowner isn't trying to avoid paying for refinancing. Income that is insufficient to support post-modification payments make qualification unlikely.
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Modifying vs. Refinancing
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Good credit, equity and closing cost payments are required to refinance, none of which are required for a loan modification.
Bankruptcy
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Lawyers commonly recommend bankruptcy in foreclosure situations. It does not necessarily prevent foreclosure, however, since the mortgage is secured by a lien. Roughly 80 percent of U.S. homeowners who declare bankruptcy lose their homes to foreclosure within a year.
Short Sale
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If the property has no equity, lenders may be willing to accept less than the mortgage balance to waive foreclosure, upon sale of the property (called a "short sale"). The lender's willingness to take less than the balance stems from the expense of the foreclosure process.
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