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Can't Make Your House Payments? 3 Potential Options

The housing market has picked up dramatically, but there are still many distressed homeowners out there.

For those who are having trouble making their mortgage payments, there are multiple options to consider.

Here are three of the most common:

  1. Loan modification. This is the first step for struggling homeowners. Often, when a distressed homeowner calls the bank's home retention department, the first suggestion the bank makes is a loan modification. It's not always the wisest option. Usually, banks will offer to lower the interest rate or the term of the mortgage. But lowering the principal isn't as common. It's a good start, but if your home is way underwater, then perhaps you need to be more aggressive on getting rid of that debt.

  2. Short sale. This is a more aggressive approach than a loan modification. It will also come with more risk and a higher cost. But if done successfully, you can be free and clear of your mortgage. Basically, you sell your house at its current market rate and ask the bank to forgive the rest of the loan. Your credit rating will take a hit, though. And sometimes, the bank will ask for a few thousand to cushion the blow.

  3. Foreclosure. This is the last resort for a distressed homeowner. It's when the bank takes possession of the home. Usually, it comes after several months of nonpayment. The bank first issues a foreclosure notice and eventually takes possession. A foreclosure can result in a larger hit on your credit score. Sometimes, you can hand the deed over to the bank. This is called a deed in lieu of foreclosure.

Which option is best for you? It really depends on your specific situation, and what you're trying to accomplish. Talk to a lawyer or check out our related resources below for more information.

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