6 Steps to Help Avoid Foreclosure

By Dawn Handschuh, Personal Finance Writer Archive

Many of life's most cherished memories are wrapped up in our homes. It's where we raised our children. It's a welcome sanctuary at the end of a long, hard day. And it probably says more about who we are than we ever realized.

Few things are more frightening than the prospect of losing your home through foreclosure. There's much you can do to avoid foreclosure, but your success can hinge on taking quick preventative action.

If you anticipate a layoff or worsening medical problems, start building an emergency fund with at least six months' worth of mortgage payments and other living expenses.

If you've already missed some payments, or you know you're going to, act now to prevent and stop foreclosure.

1. Talk to your lender.
Don't ignore late payment notices. Swallow your pride, and contact the bank as soon as you know you have a problem. Lenders are already saddled with hard-to-sell assets in the midst of the sub-prime mortgage foreclosures. Lenders can structure "loan workout" options that work best if you're only one or two payments behind.

2. Rein in spending.
Create a household budget. Carefully review income and expenses; cut unnecessary spending — gym memberships, cable TV, cellphones, movie rentals, etc. Track every purchase religiously.

3. Prioritize debts.
Focus on food, utilities and shelter first. Yes, failing to pay credit card debt will hurt your credit rating, but if it's a choice between a lousy credit score and losing your home, pay the mortgage. You can work on restoring your credit later.

4. Explore all alternatives.
Pursue every possible way to keep your home, but be wary of scams.

a. Raise cash
Sell personal property, like a second car or jewelry.

b. Moonlight
Take a second job.

5. Seek confidential counseling.
The U.S. Department of Housing and Urban Development (HUD) offers low-cost housing counseling nationwide. Call 800-569-4287.

6. Consider additional options.
With some loans, like Federal Housing Administration (FHA) loans, you can get a forbearance (temporarily reducing or suspending your payments) or reinstatement (paying a catch-up lump sum following your receipt of a bonus, tax refund or legal settlement).