What if I have more permanent problems that prevent me from making my monthly mortgage payments?

If your situation is permanent, you have more serious problems and choices. If your income has been reduced for the foreseeable future, you may still be able to modify your existing loan or refinance to bring your payments to a manageable level. If your income has been reduced to a point where there is no way you can make even reduced payments in the foreseeable future, you are facing foreclosure.

If you have substantial equity in your home, sell the property. You can probably get an equity line of credit to keep you going until you complete the sale. If you have a financially strong buyer who wants to assume your loan, ask the lender about it even if your loan states that it is not assumable. This workout assumption may be acceptable to your lender rather than having the loan repaid in full and your buyer seeking financing elsewhere. If you have little or no equity, approach your lender with one of two options.

1. The first is called a short sale. This is when the lender agrees to accept the proceeds of a sale even though it is less than you owe. This will work best if you have a buyer, but after all expenses of the sale, you will net somewhat less than you owe on the mortgage.

The reason for this type of arrangement is that it costs the lender time and money to foreclose. If the loss on the short sale is comparable to the loss the lender will suffer through foreclosure, it makes sense to accept the short sale.

From the Expert

A loan modification makes it easier to catch up on missed payments and keep the loan current in the future.

2. The second option is called a deed in lieu of foreclosure. The deed in lieu is a direct method of turning over ownership to the lender without the foreclosure process. Again, the lender saves the time and expense of foreclosure. When offering a deed in lieu, be sure that you have no obtainable equity. If a sale will net you some cash, the deed in lieu is not a good alternative.

Why should I not just ignore the problem if I cannot afford to make my monthly mortgage payments?

You may be thinking that if you have no equity, why bother with these remedies? Why not just stay in the home until you are evicted? Many people do. There are two reasons why you should not. First, it will ruin your credit. If there is any possible way to avoid foreclosure, the effort you make is worthwhile. A second reason is what is called a deficiency judgment. This means that if, after adding up what you owe on your loan — including the costs of the foreclosure — the sale does not fully reimburse the lender, you are personally responsible. If the home you used for collateral for the loan you took does not cover what you still owe, you are not just off the hook. The lender can go to court and get a judgment against you, and go after your wages and other assets.

Not all loans allow deficiency judgments. Some states do not allow them for the loan used to purchase your home, but do allow them for subsequent loans, such as the home improvement loan you got to put in the pool. One question you should always ask when applying for a mortgage loan is if it is a nonrecourse loan. A nonrecourse loan requires that the lender look only to the property for repayment. Regardless of the size of the loss the lender may suffer after foreclosure, it may not come after the borrower for reimbursement. In other words, deficiency judgments are not allowed.

What are some foreclosure scams I should be aware of?

When the notice that you are in default has been recorded (made public record at the courthouse or county recorder's office), you will most likely receive a host of contacts from people wanting to solve your problems by refinancing, helping you sell, or offering to buy your home.

There are two particular scams that are common.

1. First is called equity skimming, or in less polite circles, milking. Someone offers to buy your home right now by giving you enough money to move and maybe a little more. You are not going to get anything otherwise, so it sounds like a good deal. You give a deed and move out. The milker then rents the property until the foreclosure sale and eviction of the tenants.

The problem is that you are now stuck with a deficiency judgment. The amount of the deficiency judgment is also usually greater because of a lower auction sale price due to any damage done to the property by the tenants. Milkers are usually not very particular about screening tenants.

2. The second scam is the phony counselor scam. People will contact you offering services to help you out of your predicament. If they are not really counselors, you will end up selling your home to a milker or will be taken advantage of in some other way. Do not sign anything until you have talked to a knowledgeable person you can trust.

Is it worth talking to a financial counselor if I am facing foreclosure?

Yes. Talk to your lawyer or accountant. Talk to the real estate officer at your bank. Call the approved counselors from the FHA website, the Fannie Mae website, the Freddie Mac website, or even the MGIC website. You do not have to talk to all of these people. One or two phone calls should get you to a qualified person.

Once you have found a good counselor, make an appointment. Then make a list of questions to ask about the possibilities of avoiding foreclosure based on the alternatives previously mentioned. When you get the advice, follow up on it immediately. This is not a time for procrastination.

From the Expert

One of the most important things you can do is stay in the house until the foreclosure sale. You become Ineligible for many of the programs designed to save you from foreclosure if you are not occupying the property.

All the information you need for counselors can be found at the HUD website, hud.gov . Do not get involved with anyone who says foreclosure can be stopped immediately. This is either a scam or someone who wants you to file bankruptcy. Bankruptcy may be an option, but not until you are familiar with all your choices.

When should I consider bankruptcy?

Bankruptcy is controlled by both state and federal law. There are many books on the subject. This is not one of them. However, if foreclosure is imminent, it might be wise to consult a bankruptcy lawyer. There are two possible benefits to bankruptcy. The first is that under Chapter 7 bankruptcy, you may be able to eliminate the personal liability of a deficiency judgment — if one is permitted for your mortgage. Second, under Chapter 13 bankruptcy, you may be able to restructure your mortgage payment to make up the back payments. In either case, you will be granted a temporary stay, in which the foreclosure proceedings will be halted. This can give you time to complete a pending sale or to come up with some other option to avoid the foreclosure. Bankruptcy is not the answer for everyone and may in fact be more damaging than the foreclosure. However, it is another tool to consider, and for the right person, one that can be of great benefit.

There may also be a tax consideration.

Example: You bought your house for $200,000. You refinanced for $300,000 and foreclosure has begun. You may have to pay tax on the $100,000 over the purchase price as a profit, just as you might on a sale.

Check with your counselor, attorney, or accountant. I say "may" and "might" in the example because there are circumstances under which you will not have to pay the tax.

From the Expert

New laws enacted because of the mortgage crises of 2007 have changed some of the IRS requirements to pay tax on loan forgiveness. New laws going even further are being proposed.

Be sure to check with your tax adviser as soon as the possibility of foreclosure becomes an issue.