This increase in foreclosures has been well-documented over the last few years, and that rate of increase is predicted to continue. In the first quarter of last year, 323,102 properties across America were in some stage of the foreclosure process. This may not seem like a lot when compared to the hundred million homes in the United States, but this figure represents a 38 percent increase from the previous quarter and a 72 percent from the prior year.

Why this sudden jump in the number of foreclosures? Many blame it on the widespread popularity in previous years of “teaser” mortgage rates (in the last three years alone, Americans obtained about 1.43 million teaser rate mortgages). These mortgages start with interest rates that are extremely low, usually less than 4%. With such a low starting rate, many families and individuals with little income and low cash reserves can afford to purchase a house that they otherwise could not. The problem with mortgages that have teaser rates is that although the rate starts low, it quickly jumps up several percent, often times to more than the average subprime market rate. This abrupt rate hike means a similar increase in monthly payments, which are often unaffordable to individuals who needed a teaser rate in the first place. When the payments stop getting made, the lender begins to foreclose on the house. Financial research firm CoreLogic asserts that from 2004 through 2006, 32.2% of teaser rate mortgages ended in foreclosure.

There are other reasons why many Americans are in some stage of the foreclosure process, and sometimes it is unavoidable. The loss of a job, unexpected medical costs, or an unfortunate accident can cause a strain on finances and thus an inability to make mortgage payments. A foreclosure is not necessarily an inevitable outcome to mortgage problems, however. There are things that every individual can do to avoid having their home become the one of out every 358 U.S. homes that enters foreclosure.

The most common advice given to individuals who are getting behind on their mortgage payments is to communicate with the lender. Although financial troubles are usually unplanned, if the borrower knows that they will miss an upcoming payment, they should contact the lender as soon as possible, in person, by phone, or through correspondence (after three months of non-payment and no contact, the lender will usually start the foreclosure process). If the lender makes the first move and sends some sort of notice, the borrower should be sure not to ignore it. In these early stages of communication with the lender, the borrower should be able to provide their financial information, including monthly expenses, income, and other assets. Borrowers should keep in mind that although lenders have no obligation to help individuals with a foreclosure, it is in their best interests to avoid them. This is because the lender (usually a bank) will have to sell the foreclosed property on an open market, usually at a loss. Some mortgage experts contend that banks lose approximately $40,000 for every foreclosed property.

The first foreclosure-avoidance option that one should explore is known as “special forbearance,” in which a lender agrees to work with a borrower and arrange a repayment plan that may include a temporary reduction or suspension of monthly mortgage payments (this is usually reserved for individuals who could not avoid a financial hardship). However, a special forbearance is a temporary solution, and the lender will only tolerate a reduction or suspension of payments for a few months at most. Borrowers should make sure the lender sees their every effort to get out of debt, whether it is by taking on a second job or having a garage sale. At any point, if the borrower has increased their income enough and pays off the late mortgage payments and any costs associated with the foreclosure, the foreclosure process will stop.

The next avenue of assistance for those facing a foreclosure is mortgage modification. The idea here is for the borrower to change some aspect of their existing mortgage so that monthly payments will be lowered. Refinancing to extend the term of a mortgage can have the effect of lowering monthly payments, allowing a borrower time to catch up. Additionally, borrowers should find out if they can switch to a loan with a lower rate or one with an “interest-only” option for the financially difficult period of time. Lastly, a borrower may be able to switch to a mortgage loan with a “temporary buy down” option. With this option, a borrower pays a relatively low rate at first that increases every year until hitting a point slightly higher than the average 30-year fixed mortgage rate. These options for mortgage modification are not necessarily ideal, but may be necessary to avoid foreclosure. Be sure to also avoid what is known as “negative amortization,” the situation in which a borrower’s amount owed increases every month.

Subsequently, borrowers may seek to get a “partial claim:” another loan taken out for the explicit purpose of getting the late mortgage payments back on track. Sometimes, the lender may be willing to give the borrower an interest-free loan insured by the United States Department of Housing and Urban Development (HUD). These partial claim loans may also fall under the coverage of the Federal Housing Administration (FHA), which will sometimes give borrowers a one-time payment loan if the late mortgage payments are between 4 and 12 months past due. With these FHA Insurance loans, the borrower must sign a promissory note and the loan must be paid off when the note is due or if the property is sold.

All of the above options deal with foreclosure in a way that allows the borrower to keep their mortgaged home. However, if the financial situation is dire enough, the home may have to be sold or even given away. If foreclosure is looming, a pre-foreclosure sale of the house may save the borrower’s credit rating in the future. The idea is to sell the home at a price which would pay off the mortgage balance and any delinquent debt, and thus avoid foreclosure. Additionally, it gives the borrower a chance to purchase a new home which would be more financially affordable than the previous one. When exploring this option, borrowers should be sure to discuss it with their lender and arrange a reasonable period of time in which to sell the home (this may be difficult during a period in which the real estate market is performing poorly). Another similar way to avoid foreclosure is for the borrower to try and get a “Deed-in-lieu of foreclosure.” This is another “last resort” type of option, and allows the borrower to give back their home to the lender and is a good alternative for people who may want to get another mortgage loan in the future and save their credit rating.

Most people cringe at the thought of bankruptcy, but truthfully, it is better in the long run to go through bankruptcy than a foreclosure. If the home cannot be sold or given away for a deed-in-lieu of foreclosure, bankruptcy is the only other option. This may save the borrowers home in the end, but the borrower’s credit will obviously be hurt for the next seven years. Additionally, people going through bankruptcy lose control of their finances and thus have to deal with this lack of freedom.

These are just some of the ways to prevent foreclosure. Borrowers should make sure to contact their lenders as soon as financial troubles arrive. Furthermore, there are a great many independent companies which offer financial consultations and will strive to find out what the best option for any particular individual is in avoiding foreclosure (be sure to avoid scam agencies, however). Remember, although such a difficult financial situation may seem impossible, it doesn’t just happen to borrowers who’ve lost a job or taken out a teaser rate mortgage. Financial analysts have predicted that 12% of subprime mortgages (those with interest rates from about 4 to 6 percent) will default in the next two years, and some of those may lead to foreclosures. Borrowers with these mortgages should keep careful track of their finances to avoid such circumstances.

Published by Nathaniel Broughton at Mortgage Loan Place