Gradually I’ve been noticing newspaper articles and Internet stories about the increasing rate of foreclosures as a by-product of the national slow down in real estate values. So far it’s just a whisper, a minor acknowledgement of a looming future problem. If you’re one of the unfortunate homeowners or investors who are facing large mortgage increases and are gradually slipping toward foreclosure, time to face reality and salvage as much as you can out of a desperate situation. There are several options, not all of them are pleasant, but they should all be considered. Selling the property is naturally the best option. If you don’t have enough equity in the property to cover the outstanding mortgage, known as a short sale, you will either have to come up with the balance or ask the lender to reduce the loan amount to avoid a foreclosure. In 2005 40% of all closed sales involved no down payment money and were adjustable rate loans, so it’s not surprising to see many of these loans starting to default.

No matter how many letters you receive from the bank, you can’t ignore them. Believe me, the bank or mortgage company holding your note does not want your property. They are in the business of lending money not selling real estate. Contact your lender, they will most likely be very motivated to find a way to resolve your problem if they can. Frequently it’s possible to work out an extended or partial payment plan allowing you to stay in your home until you’re either on your feet or your property begins to appreciate.

You can also approach the lender about a pre-foreclosure sale. Essentially, you agree to help the bank sell your home before it goes into foreclosure. You can also voluntarily give back your home to the lender via a "deed in lieu of foreclosure." Neither of these arrangements will allow you to keep your property, but it will protect your credit rating. The last thing you want is a foreclosure against you, it will take years to get past it before you will be able to acquire financing again.

The last stage of a foreclosure is a public auction of the property. This is where the property is literally sold on the courthouse steps, not a pretty sight. Properties who have large notes on them or other liens generally do not sell at public auction and end up being taken back by the lender who then markets the property in an attempt to get as much as possible in order to satisfy the outstanding loan.

If you’re tempted to purchase a foreclosed property, be forewarned that you will probably be purchasing with little or no inspections and without warranties. In fact, you may even be purchasing a property with owners or tenants still living there and will have to proceed with an eviction.

Speaking of auctions, voluntary auctions have also started infiltrating the marketplace. Owners who want a quick sale without a negotiating process, or properties that are particularly unique could benefit from an auction sale.

There are two types of auctions; absolute, which guarantees the property will sell on auction day regardless of price, or reserve, which means the seller can accept or reject a sale. Auctions are heavily promoted by auctioneers and allow pre-auction open houses allowing for inspection of the property.

With all the sand we have around us, it’s very tempting to put your head in it if you’re having financial problems, but that would be a mistake. In the highly leveraged world we live in, preserving your credit rating is the most important thing you can do for your financial health. Get your head out of the sand and take your medicine, you’ll feel better in the morning.