foreclosure signFacing Foreclosure?

A house purchase is a long-term financial commitment. If you are unable to keep that commitment, you can end up facing foreclosure. This is not a good position to be in, but there are several ways to deal with the situation.

Start Paying

If you have missed a few months of payments, you probably aren't in foreclosure yet. Start paying now and contact your lender to arrange a schedule for making up all your missed payments. Do whatever is necessary to get money. Take on a second job, cut back on discretionary spending, and even ask your relatives for help if needed.

The advantages of starting to pay are that you can probably avoid foreclosure, which means you'll keep your house. The drawbacks are that it may be painful to rearrange your finances to make it happen, and starting to pay now won't erase the notations on your credit history that you failed to pay your mortgage on time.

Deed in Lieu of Foreclosure

This simply means that your lender will cancel foreclosure proceedings in exchange for the deed to the property. You might still be in a position of paying the difference between your loan and what the property brings to the lender when it is sold.

The advantages of this method are that you will definitely avoid foreclosure and you might not owe any further money. This will occur if the bank chooses to forgive any loan balance that exceeds the sale price of the house. Also, it impacts your credit score far less than a foreclosure would. Strong disadvantages exist, however. Depending on your circumstances, the IRS might regard that forgiven balance as income, and you will be responsible for paying taxes on it if the home is not your primary residence. Since it represents money you did not in fact receive, you may not have any funds to pay those taxes. Consult your accountant.

Short Sale

In a short sale, the owner sells the property for less than the value of the outstanding mortgage. The balance of the loan is typically forgiven, which can create a taxable event if the property is not a primary residence.

The pros of a short sale are that it's less damaging to your credit than a foreclosure, and that banks are increasingly more willing to do short sales than the "in lieu of" method described above. The cons include the fact that you can't do a short sale without the permission of your lender; the time needed to secure that may cause the buyer to walk away. Some banks are more willing than others to allow a short sale.

Loan Modification

In a loan modification, the lender agrees to renegotiate the mortgage contract. The total amount of the loan, the interest rate, and the payment schedule may change in order to create a loan that is more realistic for the borrower to pay back. The advantages of this are that you may be able to keep your home, and in a way that minimally damages your credit. The disadvantages are challenging fees and paperwork, dealing with a reluctant bank, and some notations on your credit history.


This is the worst option of all. Foreclosure puts a black mark on your credit record that lasts for years and affects not just borrowing opportunities, but employment and rental prospects as well. You should strive to avoid foreclosure at all costs by choosing one of the alternatives described above.

Posted by Jolenta Averill on
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You did a great job breaking this down for homeowners. Thank you for the blog!

Posted by San Antonio real estate on Saturday, January 8th, 2011 at 3:03pm

Good post - I try to educate people as much as possible about foreclosures and the implications they have for people for years to come. It's good to see the other options that people have - options they need to be aware of before making a decision.

Posted by James Foxx on Monday, January 10th, 2011 at 12:44pm


Excellent information for everyone experiencing financial difficulties.

It's important for everyone to understand there are options and as long as home owners educate themselves, they stand a better chance of alleviating their financial burdens and getting themselves "whole" again.

Best wishes and continued success.


Posted by Jennifer Mackay | Panama City Beach Condos on Monday, January 10th, 2011 at 1:39pm

This is an excellent article for those that are in the difficult process of facing foreclosure. This is seriously one of the best articles I've seen on the topic so far--great advice.

Posted by Simmon Campbell on Tuesday, January 11th, 2011 at 11:12am

I have never done a deed in lieu or for that matter directly know anyone who has, but from what I have read it is not a viable alternative to foreclosure as loan modification or a short sale would be in regards to the impact it has on your credit or future borrowing implications as many lenders that I have spoken to regard it more like a foreclosure than the other alternatives.

Posted by Spring Hill Columbia Real Estate on Tuesday, February 1st, 2011 at 6:13pm

Great article, short and sweet and easy to understand. I have processed short sales for a couple years now, many without deficiency judgements placed against up-side-down borrowers, so definitely a great pre-foreclosure option. Also worked with a small number of deed in lieu of foreclosures that were successful, definitely more damaging than a short sale on credit & future finances, but better than a foreclosure, and an option that a lot of people have never heard of. Great info!

Posted by miss feliss on Tuesday, April 19th, 2011 at 6:07pm

This advice is just as essential today as it was when you wrote the post. This is advice I can pass along to some of the couples I am counseling during their divorce process.

Posted by Divorce and Real Estate on Sunday, March 25th, 2012 at 3:01am

Great article. The only problem I see is many mortgage companies will not allow you to make partial payments. If you miss 2 payments, they will send them back unless you pay the full amount. What do you do if you can't reach them by telephone, a common problem also.

Posted by Facing Foreclosure on Saturday, November 17th, 2012 at 1:21am

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