How to Avoid a Foreclosure: Sell or Give Back to the Lender?

If you have fallen behind on your mortgage payments and don't foresee getting the money needed to avoid going into foreclosure, it's time to take action. A foreclosure will stay on your credit report for many years and negatively impact your credit score, along with your ability to get new credit, notes myFICO.com. You can avoid a foreclosure one of two ways: by short selling your home or giving it back to the bank in what's called a "deed in lieu of foreclosure" process.

• 1

  Call your lender to say that you would like to short-sale your home and ask for the minimum offer that the bank will accept. In a short sale, you sell the house for less than you owe, according to Mortgage Daily News. Ideally, the bank forgives and writes off the remaining amount of your mortgage and you walk away without a foreclosure on your record. However, you may be required to pay the deficiency.

• 2

  Put your home on the market at a price that is comparable to those selling in your neighborhood. A local real estate agent can help you list your home on the Multiple Listing Service (MLS) so that other agents serving home buyers can find it. The agent also will tell you what other homes in the area are selling for so that you list your home at a reasonable price. However, the final sale price will have to be approved by your lender.

• 3

  Continue to pay as much of your monthly mortgage payments as possible. If you fall too far behind, foreclosure proceedings will begin or accelerate. Many banks consider you to be in default if you are behind on your payments, even if you are still making partial payments each month or have missed payments and are now making full payments.

• 4

  Call your lender's loss mitigation department if there is no interest from buyers. Ask for a deed in lieu of foreclosure package. In this transaction, you can spare the lender the long and costly process of foreclosing on your home by voluntarily handing back the property in exchange for a less negative reporting on your credit score.

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  Fill out the deed in lieu of foreclosure documents that arrive in the mail and provide the necessary documentation, such as a hardship letter and detailed list of all of your income streams versus your monthly expenditures. Send the completed package with attached documentation back. While much of the same documentation is required for a deed in lieu of foreclosure and a short sale, some of the lender-specific paperwork and applications will be different.

• 6

  Wait while your deed in lieu of foreclosure request is processed. This can take weeks or even months, depending on how swamped your lender is with foreclosure and short-sale proceedings. Don't be afraid to call the loss mitigation department to confirm it received your package to follow up on the status of your request. However, generally a deed in lieu of foreclosure will take less time than an actual foreclosure, according to the Mortgage Daily News website.

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  Follow the detailed instructions provided by your lender if your deed in lieu of foreclosure request is approved for transferring full ownership to the lender, handing back the keys and vacating the property. Be prepared to see a drop in your credit score. However, a deed in lieu of foreclosure will affect your score much less than an outright foreclosure, notes Mortgage Daily News.