The 411 on Foreclosures

Considering the myriad challenges homeowners face - from paying for rising property taxes to making needed repairs - it's surprising more of them don't pull their hair out while engaging in profanity-laced tirades. But there's one dirty little word that even the least superstitious homeowner is loathe to utter, let alone ponder: foreclosure.

A foreclosure is a legal proceeding by which a lender forces the sale of a property after a debtor has defaulted or failed to make payments, according to Frank D. Edens, CEO of U.S. Legal, Jackson, Miss., a publisher of legal information. "Legally, a foreclosure is a process for a lender to regain control of the property because the buyer has violated terms of a contract," he says.

To initiate a foreclosure, "the lender must serve a notice of default on the debtor after a certain time period when payments are past due," Edens says. "The notice will give the borrower a time frame and list an amount necessary to be paid in order to 'cure' the default and avoid foreclosure. If the delinquency and other costs are not paid within a determined time, then the lender - or the trustees in states that use deeds of trust - will set a foreclosure date for selling the property at a public sale."

State foreclosure laws vary, Edens says. In some states, the mortgage holder must go through a court proceeding known as a "judicial foreclosure." In others, a non-judicial foreclosure is allowed. Both types require giving notice to the borrower. Regardless of the type, the foreclosure process can be as short as six weeks and as long as two years, depending on the state.

The prevailing thought about foreclosure is "it can't happen to me." Yet the experts agree that any homeowner is one unexpected misfortune away from being at risk of losing their property.

Jim LaVallee, vice president of EpiCity Real Estate Services, Atlanta, says that the common causes of foreclosure are circumstances that any homeowner can be vulnerable to, including an expensive illness or death of a family member, the loss of a job or a significant income change, or a costly divorce. Any of these major, unexpected life events can lead to an inability to afford monthly mortgage payments.

Additionally, with the widespread availability and popularity of zero-interest, balloon-payment, adjustable-rate and other types of loans in the past few years, many borrowers have overextended their resources - purchasing more than they could afford over the term of the home loan, Edens says. As a result, more borrowers are at risk of future foreclosure.

A foreclosure cannot only leave you without a roof over your head, it also can damage your credit, making it more difficult and costly to obtain financing thereafter.

"A foreclosure will be on a borrower's credit report for seven years but will only have a major impact on borrowing capacity for about four years," says LaVallee.

To reduce your vulnerability to foreclosure, Edens recommends good fiscal common sense.

"First, don't buy more than you can afford. Don't get caught up in easy purchase/finance marketing that causes you to act when you should not. And use acceptable debt-to-income ratio guidelines to determine what you can afford," says Edens.

The easiest way to prevent foreclosure is to simply find a way to pay off the debt, says David Stone, president of Nevada Association Services, Inc., Las Vegas, a collections agency that specializes in non-judicial foreclosures.

"Other options include contacting the lender and arranging a payment arrangement more in line with what you can afford," Stone says. "Communication with the lender is very important in these situations."

Geoffrey Gold, a partner with Rutter Hobbs & Davidoff, a Los Angeles firm, agrees.

"Homeowners can always negotiate with the lender," Gold says. "But do not ignore letters from the lender, and don't forget to pay your mortgage, even if you do not get a statement."

Edens says that the lender may be willing to give you extra time to pay or may suggest debt counseling to restructure or consolidate your debt. It also may be possible to create a trust account to protect your assets or to rework your loan for an extended time period for the purpose of lowering your monthly payments.

It's never too late to avoid foreclosure so long as the foreclosure sale has not been completed, says Stone. "After that, a costly lawsuit could be brought in order to show why the foreclosure should be reversed," he says. "A court may reverse a foreclosure if it is determined that a substantial error occurred in the foreclosure process. After-the-fact reversals, however, are seldom and extremely expensive to pursue."

A debtor also can opt for a voluntary foreclosure, which involves selling the home to the lender.

"This can minimize the damage to a debtor's credit record," Edens says. "In a voluntary foreclosure, the debtor may not be held liable if the home sells below the debt amount."

Because of the loss of financial control and the credit damage involved, filing for bankruptcy generally is considered a last resort to avoid foreclosure.

"Bankruptcy can stall a foreclosure. However, eventually the debt will need to be paid or the lender will foreclose on the property," says Stone.

Lastly, LaVallee cautions that borrowers have to be careful when it comes to quick-fix foreclosure solutions.

"You may be contacted by many different people - from attorneys handling bankruptcies, credit repair and renegotiation companies, and real estate investors wanting to buy the house," he says. "Some of these groups can truly provide a solution, but often they are only selling hope and taking your last few dollars. Make sure to do your research on anyone claiming to have an easy way out of your financial dilemma."

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