The Debt Adviser By Steve Bucci • Bankrate.com

Avoiding foreclosure

Dear Debt Adviser:
We bought a home in the Dallas-Fort Worth area a year ago January. The following March my husband lost his job, and it was six months later that he got another one in a different state. We were able to lease the house in Dallas and move and buy a new home. Our tenants are going to be moving out soon and we are putting the house back on the market for a higher price than similar houses in our neighborhood or trying to lease it again.

I am worried that we won't be able to sell it or lease it again. We have had excellent credit up to the present. What would happen to our credit -- and us -- if we let the house in Texas go back to the bank? Thank you.
Beth

Dear Beth:
A foreclosure is surpassed only by bankruptcy as the worst item to be included in a credit report.

But there is another consideration that is not credit report related. In terms of personal stress and a sense of failure, loss of a home is certainly one of the worst things a family can experience. There are very real emotional and self-esteem ties to a home that get damaged with a foreclosure. The damage can last for years and even cause marriages to suffer.

The short answer to your question is that your credit rating would take quite a hit from a voluntary foreclosure, and that black mark will remain on your credit report for seven years from the date of foreclosure. As a result, it would be very difficult for you to obtain credit for another large purchase and any credit you could get would likely be at a much higher interest rate and with a higher down payment than with your current excellent credit standing.

I believe you are on the right track by attempting to sell or lease your home in Dallas. You state that you are putting the house on the market for a sale price higher than similar houses in your neighborhood. Unless you need that higher price to satisfy the mortgage loan, I would recommend you ask three real estate sales people familiar with the neighborhood to give you a fair selling price and use that number to increase your chances of the home selling. And even if you do need more money from the sale, it may give you information that will make it easier to work out a payment plan with your lender for the difference between the sale price and your mortgage, than to continue making payments while your house is on the market.

Unfortunately, in this time of corporate layoffs and a sluggish economy, you are not alone. Many people are experiencing or are just months away from a foreclosure on their homes. Your goal should be to avoid a foreclosure. Communicate with your mortgage lender and let them know your situation. Do this now while you are current with your payments. The call will be much more difficult if you wait, and you will get a much better reception if you call in advance of default. Let them know you are working to sell or lease the home, but may have difficulty making the mortgage payments if the house does not sell or lease quickly.

Some options that you can ask your lender to consider in the event you need to avoid foreclosure include:

• Special Forbearance. You may qualify for a temporary suspension of your payments if the lender feels that you are likely to sell your house within a few months or resume payments once your home is leased.
• Pre-foreclosure sale. In this type of sale, you may sell the property for less than the amount that you owe. However, your lender will impose restrictions on the terms of the sale.
• Deed-in-lieu of foreclosure. You may be able to voluntarily give back your property to the mortgage company if you are in default and don't qualify for any other options, your attempt at selling the house before foreclosure were unsuccessful and you don't have another mortgage in default. The plus for the lender is they get a clean, undamaged property to sell without foreclosure fees and legal expenses. The plus for you is harder to see -- other than you also avoid those same costs and aren't tarred with the black mark of foreclosure on your credit.

Please research all your options carefully, watch out for those who will try to make money on your misery, and here's hoping your home sells quickly!