A foreclosure occurs when the lender takes over your property after you do not pay your monthly mortgage payments. Generally speaking there is a process that protects homeowners from immediately losing their home. Most states require at least three months of missed payments before a homeowner is forced out.

Generally speaking foreclosures occur in a down market. In a rising market a homeowner should be able to sell their home and have enough left to pay off the debt with the remainder going into their pockets. In a down market when a "quick" sale is not an option or the sales price would be below the amount of debt owed on the property - foreclosures happen with increasing frequency. They can also happen in genuinely hard personal circumstances such as loss of a good paying job, divorce or unexpected medical expenses.

It is very important to keep in mind that the lender (unless they are predatory lenders) does not want to foreclose on the house because it means they will suffer a loss on the sale. Knowing that, you can take steps to avoid a foreclosure. Here is a look at what you can do to stay out of a foreclosure:

• Call your lender and explain your situation. When you go to meet them for a further follow up on the issue, show your monthly income and expenses so that they know the reason why a default has happened. DO NOT avoid answering their phone calls or their mails. Respond quickly and in writing.

• You may be given the option for a forbearance or reinstatement as temporary solutions. If you expect your finances to get better, you can opt for a reinstatement as it is possible for you to make a large payment that will pay back all the defaults on a specific date. You may be able to do this by re-financing. In forbearance you are allowed to forego your missed mortgage payments with a plan that generally involves lower payments but at a higher interest rate and longer term. These plans are generally graduated which means that payments will rise in later years.

  
  

  • You can opt for a repayment plan under which you start making up for your defaults by contributing to the default in addition to the regular mortgage payment amount. This helps you to pay off whatever you have missed and your account become current.

  
  
  
  

  • You can consult with your lender for a modification of the mortgage terms. Under the new mortgage terms, you will pay up the default amount, except that instead of paying it off in one shot the default amount will be added to the principal loan amount and payments towards it will be spread over the entire loan period so that your finances are not strained.

  
  
  
  

  • If your lender agrees, you can sell your home and use the proceeds to payoff the loan. This means you become debt free, but unfortunately you have to lose the home. A short sale occurs where there is not enough to payoff the debt - the lender has to agree to this sale. The IRS will also tax you on this debt forebearance, so make sure you understand the tax implications of this event.

  
  
  
  

  • Defaulting on mortgage payments is a sure sign that your financial condition/planning is in poor shape. It is possible to overcome this hurdle. You should seek out credit/financial counseling to help you realistically solve your financial problems and rebuild your life.