If you made a down payment on your house of less than 20 percent of the purchase price, your lender probably required you to take out something called private mortgage insurance, or PMI. You were required to buy PMI because by borrowing more than 80 percent of the purchase price you are in greater risk of default than someone who borrows 80 percent or less. When you took out the loan, you probably cursed the extra amount you were required to pay each month for PMI. But if you're having trouble paying your loan, PMI could actually help you. The insurance company may loan you money to meet any shortage to prevent foreclosure.

Sell the Property

You are certainly better off selling the house than having it go to foreclosure. If you can find a buyer who will offer to pay at least what you owe your lender, take the offer. Ideally, you will find a buyer who is willing to pay the amount you owe your lender and any other lienholders, such as a second mortgage lender or the IRS if the taxing agency has recorded a lien against you for unpaid taxes. There are investors who specialize in buying real estate heading for foreclosure. You won't get top dollar and you may lose any equity you have in the property, but it's still better than having the lender foreclose.

When listing your house with a real estate agent make sure that you are being realistic about the sales price. Often real estate agents will tell you they can get a high price for your home because that is what you want to hear. However, if what you really need is a quick sale you might want to think of listing your home for a bit less than the going rate. What you need is for the home to sell for an amount more than the mortgage balance, before the auction date. Sellers in foreclosure often get greedy and try to get the highest price possible only to watch their house sit on the market without any takers.

Be careful of people who advertise as pre-foreclosure investors, however. Some of them are sharks. For example, don't agree to deed your house to someone who promises to sell it for you. The person will more likely collect rent from you, not make any mortgage payments, not try to sell the property and just let the lender foreclose. Although the deed isn't in your name, the mortgage still is and you are still liable on it. The foreclosure will go on your credit record and you may owe any shortfall between the auction price and your total balance due.

In addition, be sure to get all understandings in writing. If you have any doubts about the person with whom you are dealing, ask for the names and phone numbers of references, and call them. Then call your state Department of Real Estate to ask about the investor. If anything sounds fishy, don't pursue the deal.

You may be anxious to walk away from your house because it has depreciated in value and you owe your lender more than the house is worth.

Up until a few years ago, you would have had a hard time selling your house under such circumstances. That's because your lender can block any sale if it won't bring in at least the amount you owe the lender. But lenders began to realize that getting something is better than getting nothing.

Today, many lenders will agree to a "short sale." This is a situation in which the sale of the house brings in less than you owe the lender, but the lender agrees to forgive a portion or all of the difference.

A lender will not typically agree to a short sale unless you provide documentation of financial or medical hardship you are experiencing - that is, unless you can justify to the lender why you are having trouble paying. Divorce, job layoff, unexpected living expenses, illness or death - those are usually acceptable reasons.

So is a lack of cash reserves because of extraordinary and unexpected expenses, such as a required move due to a job change resulting in your paying the mortgage on your old house and housing expenses for your new home.

As mentioned, documentation is key. Be prepared to provide your lender with recent tax returns (anywhere from one to three years) and one of the following types of information:

  • Letters from doctors documenting
  • Health problems
  • Efforts of your job search
  • Divorce decree specifying who pays what and default notices if your spouse was ordered to pay bills but has not, or
  • Efforts you've made to sell your home

Deed the Property Back to the Lender

If you get no offers for your house or the lender won't approve a short sale - which especially may be the case if your loan is held by Fannie Mae or Freddie Mac or was issued by the Federal Housing Administration - consider walking away from your house. Call the lender and ask if it will accept your deed in lieu of foreclosing. Many will.

If the lender won't, prepare what's called a quitclaim deed - you "quit" your interest in the property and transfer ownership to your lender. You write DEED IN LIEU OF FORECLOSURE in block capital letters across the top of the deed, pay any transfer fee, record the quitclaim deed where you recorded your ownership deed and mail a copy of the recorded quitclaim deed to the lender. You no longer own the house. Your lender does.

Whatever You Can Do to Avoid Foreclosure

The key to avoiding the loss of your home is to take some sort of action as quickly as possible. These situations rarely get better with age. If you are unsure of what to do you can make a phone call for a free foreclosure consultation and get some advice. That seems to make sense if you don't know what to do first.

Talking to a lawyer would another option. It never hurts to find out what your legal rights and options are when facing anything as serious as the loss of your home. You can find an attorney here that might be able to lend you a hand today to help you avoid foreclosure.