Understand Foreclosure Help, Your Rights & Alternatives

Though foreclosure rates are now at the lowest levels in more than a decade, millions of homeowners still struggle to pay the mortgage every month. Whether the culprit is a job loss, temporary disability or another unexpected reason, falling behind on the mortgage is stressful. Since the financial crisis, lenders and government entities have become more equipped to head off foreclosures, and this gives homeowners a wealth of choices.

Below you'll find an overview of the alternatives to foreclosure, including federal programs created in response to last decade's housing crisis, and advice about keeping your home in tough times.

• Forbearance
  Lenders sometimes offer struggling homeowners a temporary break from payments or a reduced monthly mortgage payment while the borrower improves his financial situation. A lender might offer forbearance if you lose your job or are waiting for a tax refund.

• Short sale
  Say your mortgage balance is $220,000, but your home is worth only $200,000. In a short sale, you sell your house for $200,000 and negotiate with the lender to write off the $20,000 difference. Your credit will take a hit, but it won't be as severe as in a foreclosure.

• Deed in lieu of foreclosure
  Also called mortgage release. Instead of litigating a lengthy foreclosure, you agree to give the property to the lender. Options are available, sometimes with a relocation incentive, to help you leave the home immediately, stay in the home for up to three months without paying rent or lease the house at market rates for up to a year. Depending on your situation, you may have to make a financial contribution to receive a mortgage release.

Your lender or housing counselor can guide you through your options to find the most appropriate program for you. Answers to the following two questions can help you get started:

If foreclosure is inevitable, here is what to expect of the foreclosure process, based on rules from the Consumer Financial Protection Bureau (CFPB) and general state rules. Some states require a foreclosure to be filed in court, others don't.

A mortgage servicer may not make a first notice or filing for foreclosure until the borrower is more than 120 days delinquent. The 120-day window is designed to give borrowers time to learn about workout options and file an application for mortgage assistance. Under CFBP rules, the servicer must make it easy for you to reach its employees. If you pursue a loan modification, the servicer's employees must tell you if you've failed to complete the application. The CFPB prohibits "dual tracking," when a loan servicer or lender pursues foreclosure while simultaneously working to avoid foreclosure. So if you've submitted a complete application for a loan modification or other alternative to foreclosure, the lender can't start a foreclosure proceeding. Servicers must also consider an application for loan modification so long as it arrives at least 37 days before the date of the scheduled foreclosure sale.

Timelines can vary widely, from a few months to more than a year. According to RealtyTrac, a lender in Texas typically needs just 27 days to repossess a house, for example, and in New York, the timetable is 445 days. The foreclosure process is different in every state, and perhaps the most significant difference is whether a state uses "judicial" or "non-judicial" proceedings to settle foreclosures. In judicial states, including Florida, Illinois and New York, foreclosures must go through the courts and be approved by judges. In these states, foreclosure proceedings tend to drag on for months or years. In non-judicial states, such as California, Michigan and Texas, foreclosure is much quicker. It might be a matter of weeks from the initial legal filing to eviction.

Other factors affecting the length of foreclosure procedures include the efficiency of your loan servicer's foreclosure department, the swiftness of the foreclosure courts in your area, and how badly the lender wants to foreclose. You'll need to check with an attorney or housing counselor for a precise timeline, but here are a couple of examples:

FHA loans are known for their low down payment requirements and liberal credit scoring rules. There's another advantage: FHA mortgages offer generous "special forbearance" terms for borrowers who lose their jobs.

The U.S. Department of Housing and Urban Development offers up to 12 months of forbearance for borrowers who meet the qualification requirements.

To qualify for a lower payment through the special forbearance program, the borrower must:

• Be at least 61 days delinquent, but not more than a year delinquent.
• Continue to look for a job
• Make at least small monthly payments on the loan if approved for the program. You can lose your forbearance if you fall 60 days behind on payments. Even so, FHA mortgages carry comparatively generous forbearance plans.

When it comes to keeping veterans in their homes, the U.S. Department of Veterans Affairs is very hands-on. As a result, the VA boasts the lowest foreclosure rate in the mortgage industry.

When a VA borrower hits 61 days past due, the VA automatically contacts him to offer advice and support. For borrowers struggling to make mortgage payments, the VA offers various alternatives to foreclosure, including:

• A repayment plan that lets the borrower catch up on missed payments.
• Special forbearance, in which the servicer agrees not to file foreclosure proceedings while the borrower looks for a job or waits for a tax refund.
• A VA loan modification that sets a new payment schedule and adds any missed payments to the loan balance.
• Time to arrange a private sale, if the transaction means the loan will be paid off.

Once you sign a mortgage, you're locked into those terms for the life of the loan. If it's a 30-year mortgage with a 5 percent interest rate, for instance, you must keep up with your monthly payments or pay off the loan entirely. If not, you're in default — even if a job loss or other hardship has undermined your financial situation. In some cases, though, lenders are willing to work with you, in the form of a loan modification. The lender agrees to change one or more of the terms of your deal. The modification could be a longer term, a lower interest rate or a lower principal amount. In general, lenders aim to make your monthly payment equal to 31 percent of your gross monthly income after the loan modification.

A layoff can be financially and emotionally devastating, but lenders know job losses are part of today's labor market and might be willing to work with you to avoid foreclosure. However, you must be proactive about addressing your financial woes. Waiting until you've missed a payment or two will hurt your credit score and limit your options. If you fear a layoff is imminent, meet with a housing counselor to discuss your options — even before the pink slip arrives. As soon as you lose your job, communicate immediately with your lender. You will first have to write a hardship letter — you can see a sample hardship letter here — to your lender's Loss Mitigation Department outlining your job loss. The letter should include your loan number, a brief description of your situation and how you plan to make on-time payments again. Don't use the letter as an opportunity to complain about past slights. You might not hear back for 30 days. Ideally, your lender will agree to a forbearance, and you won't have to make payments for a few months while you look for work. Typically, the unpaid payments will be added to your loan.

• Fannie Mae's KnowYourOptions.com
  This site run by mortgage giant Fannie Mae includes tips for staying out of foreclosure and avoiding scams.

• My Home by Freddie Mac
  Mortgage giant Freddie Mac offers information about a variety of loan-related topics, including avoiding foreclosure.

• CFPB Mortgage Help
  This site run by the federal Consumer Financial Protection Bureau includes links to state housing finance agencies and to HUD-approved housing counselors.

If you've determined you can no longer afford your home, options available that might be better than foreclosure include:

With a deed in lieu of foreclosure, the borrower saves the lender court costs, so the lenders might be willing to pay you to go away. Try to negotiate with the lender for relocation assistance.

If, on the other hand, a lender starts foreclosure proceedings, the lender no longer has an interest in facilitating your quick departure from the home. In that case, create your own relocation fund. Since you won't be making mortgage payments before a foreclosure, housing counselors suggest banking the money you would have spent on mortgage payments, or as much as you can afford. By carefully guarding that cash, you may have a few thousand dollars to go towards your first month's rent and security deposit at a rental home.

A foreclosure will devastate your credit score, and you'll need to diligently pay your bills on time for several years to become creditworthy again. Credit scoring giant Fair Isaac Corp. is vague about exactly how much a foreclosure will slash your score. But Lita Epstein, author of The Complete Idiot's Guide to Improving Your Credit Score, says losing your home to default will send your FICO score into the 400 range. A foreclosure will make it harder for you to rent an apartment and all but impossible to land a car loan or credit card. However, the foreclosure will fade in importance over three to four years. That's why "boomerang buyers" — former homeowners who lost houses in the Great Recession and now are buying again — can qualify for mortgages. To rebuild your credit score, be meticulous about promptly paying credit cards, medical bills, rent, car payments and any other accounts.

Looking for advice on avoiding foreclosure? Vanessa Fuller, a certified housing counselor at ClearPoint Credit Counseling Solutions, shares her expertise.