Refinance: You can refinance your home.  If you have a lot of equity, in your home, and you're not too far behind on payments, this is a great option.  Equity comes from either having paid a large portion of your principle debt, increased value of your home or a combination of both.  Refinancing can lead to higher monthly payments especially if you borrow more than the original amount of the loan.  Usually the lender would refinance the existing loan and include as part of the new loan any late payments, and fees that you would need to regain control.  It would all be "wrapped" into one mortgage.  The challenge that most homeowners have is they have leveraged their home to the max.   Therefore, very little equity is in the home especially when you add on back payments and fees so it becomes very difficult to refinance.  On top of this, if your refinancing places you in a position of having less than 20% equity in your home, you will also incur the additional cost of PMI (Private Mortgage Insurance).  This is insurance that the bank requires the homeowner to pay to offset possible losses against the bank.  The cost of such insurance can be very expensive, further increasing the amount of the monthly payment by hundreds of dollars.

Recasting: This option is slightly different than refinancing.  Essentially, if your lender allows this option, you can re-amortize your existing loan.  How this option differs is that it allows you to restructure your monthly mortgage payments to a lower amount based on a lower debt amount rather than built equity.  You must have paid a substantial amount of money against your principle either through time or by additional funds being directed towards reducing your principle.  You then ask your lender to amortize the loan based on this lower debt amount.  For example, you’ve owned your home for six years during which time you have been making additional payments to reduce the principle amount of your 30 year mortgage.  Your initial mortgage amount was for $250,000 and you have paid it down to $190,000.  Due to circumstances, you are beginning to have difficulty making your monthly payments.  You ask your lender to recast your loan.  They agree, starting the clock again for 30 years at the same interest rate.  However, since you are financing $190,000, instead of the original $250,000, your monthly payments go down.  You are not borrowing money for debt consolidation or taking out your equity.  You are merely restructuring your payments based on a lower debt amount.  Recasting does assess a fee but it does not involve having closing costs.  Usually, the fees amount to a few hundred bucks as opposed to a few thousand, as would be the case if dealing closing costs.

Reinstatement: You may ask for and be allowed to reinstate, or make the loan current, by paying a lump sum or making scheduled payments over a given amount of time.  Just explain to them you had a few bad months and things are now better and most lenders will try to work something out with you.  The important thing to note is that you must be able to prove that your circumstances have changed.  If you state that you failed to make payments because you were out of work but are now back to work, then they may allow a reinstatement.

Here is an example:
Paul falls 3 payments behind on his house.  His monthly mortgage payment is $2000.  To this we add $500 in late fees.  Paul owes a total of $6500 to reinstate the loan.  He sells a bunch of his personal stuff and raises $10,000.  So he pays the bank, they say "Thank You" and Paul continues to make his regular monthly mortgage payment.  The Notice of Default (NOD) is canceled, the home is brought out of foreclosure, and everyone is happy. However, Paul's credit was still hit with the NOD which will hurt a little.

Forbearance: A Forbearance Agreement is very similar to reinstating the loan.  This is when you actually negotiate a "deal" with the bank.  You can ask the bank if they will add on the amount owed in back payments to the back of the loan.  You could even ask if the bank would be willing to take a smaller portion upfront and add the rest to the back of the loan.  Another option is to ask to pay some upfront and forgive the rest.  Or you could even ask to forgive the whole thing.  You never know unless you ask.  Banks want to work with you, provided that a change in your circumstances warrants such consideration.

Repayment Plan: A repayment plan is structured to cure the delinquency over a period of months by paying a full payment each month, plus a partial payment on the delinquent amount each month.  An initial down payment may be required.  The amount that you have to pay, over and above your regular monthly payment, will be based on your financial situation and your initial down payment.  You may be eligible for this plan if you have experienced a positive change in your financial situation.  Many people realize a short term financial hardship that has caused them to become delinquent.  When they get back on their feet, financially, they may need a little help getting caught up.  In such cases, a lender may consider a repayment plan.  A lender may ask for 25-50%, of the arrearage, allowing the remainder to be paid over a period of months, usually between 18 to 24 months.  You will need to provide financial information to prove that you are now capable of meeting this responsibility. Remember, this monthly amount is in addition to your usual mortgage payment.  Most likely, you will also need to provide proof that your real estate taxes are current.  You should also ask the bank how this will affect your credit.  Although it will stop foreclosure, in some instances, the bank will continue to show you as paying late until the amount due is made completely current.

Mortgage Modification: If you have experienced a permanent reduction in income due to a severe medical hardship, loss of a spouse, legitimate increase in expenses, or other permanent hardship, a mortgage modification may be the answer.  A mortgage modification means to refinance the debt and/or extend the term of your original mortgage loan.  This new amount will be re-amortized over a new period of time.  This will make your new monthly payment affordable and allow you to build the missed payments into the new loan.  A mortgage modification will change your existing mortgage note and give you a fresh new start in managing your home.  Your account will be brought up to date immediately.  Not all lenders will offer a mortgage modification and some offer it only in hardship situations.  However, it is one of the easiest and fastest ways to stop foreclosure and get back on track with your payments.

Sell Your Home: If you believe that you will continue to have difficulty making your mortgage payments and that your hardship or reduced income is permanent, you may have to consider selling.  When selling your home, you have a couple of options.  You can either list your home, with a Realtor, or you can sell your home yourself known as "For Sale by Owner" or FSBO.

·         Realtor - If you have equity, the home is in marketable condition, you price it for a quick sale, and you have sufficient time before the auction, this can be a great option.  The advantages are that Realtors possess the experience, knowledge, network and access to marketing tools that are not available to an unlicensed individual.  By enlisting the help of a network of people and having access to marketing tools, real estate agents can provide your home with the exposure that you may not otherwise have.  They also have automatic access to one of the most visited real estate web sites - www.Realtor.com.  This site contains the listings published in the many MLS' (Multiple Listings Services) across the country.  Real estate agents can also qualify potential buyers so that they find people who are ready, willing and able to buy your home.  In many instances, the Realtors have developed professional working relationships with lenders, attorneys, accountants, title companies, inspectors and contractors from which the homeowner client can benefit.  Although these established professional relationships, marketing tools, knowledge, experience and network can be invaluable, they do come at a cost.  If you have very little equity or the house is not in marketable condition, it can be difficult to sell homes with real estate agents.  This is because you have to pay a Realtor commission.  Typically the commission rate is between 5-6% of the purchase price.  This means that the house needs to be priced so that it will cover the cost of the Realtor’s fees as well as the existing mortgage.  In addition, the price should not exceed the amount for which the home would appraise.  In most cases, if not all cases in today's market, lenders will not approve a loan for an amount that exceeds the appraised value of the home being sold.

·         FSBO - You can try to sell the house yourself by placing a FOR SALE sign in your front yard.  If you go this route, you should tell everyone you are selling your home.  Maybe they know a friend or relative who is looking to buy in the neighborhood.  If you live in a high traffic neighborhood with listings, you have a very good chance people will call you.  This method of home selling requires you to take a more active role in the sale of your house.  You’ll need to rely on your personal skills of salesmanship and marketing in the form of posted signs, flyers, newspaper ads, the Internet and word of mouth.  Although, going this route, will save you the cost of a commission, you will still incur some costs associated with the sale of your home.  That is unless you plan on solely using word-of-mouth in which case you will be seriously limiting your market.  The newsprint media can be very expensive, depending on the size of its subscribers.  Even with that, the advent of more advanced technology has caused newspapers to suffer a substantial loss of its readership base.  You can utilize web sites such as www.FSBO.com and www.BuyOwner.com where they usually charge a flat fee rather than a commission.  You may also consider some free sites such as Craigslist and Zillow.  You'll need to prepare yourself for the telephone calls and strangers wanting access into your home.  People whom you don't know if they are even qualified to purchase a home.  Don't forget that you'll also need to work with a title company and may even need to consult with an attorney to ensure that you have a well written, legal and binding contract form.

If you have great salesmanship skills, have the time and the energy needed to put forth in selling your home, then this may be the way to go for you.  You’ll need to weigh the savings of a commission when compared to the limited marketing and the concerted efforts required on your part.  The advantage of selling it yourself is, obviously, the savings of the typical 5-6% commission.  But you must also bear in mind that the potential buyers will want to share in your commission savings by offering less money so they can get a better deal.

Regardless of whether you use a Realtor or go it alone, a property appraisal is extremely helpful to determine the fair market value of your property.  To obtain one will require you to incur an expense that will vary depending on the appraiser.  Another helpful document, to determine your property’s value, is a Comparative Market Analysis (CMA).   A CMA compares the listed and sold properties, in your area, similar to your home.  A local Realtor can provide you with a CMA on your property.  In certain instances, the homeowner cannot sell the property due to upside-down finances.  This means that the borrower owes more, on the property, than it is worth.  Housing values, in your area, may have declined which may result in an offer to purchase that is less than the total debt due on the property.  Such circumstances may lead to what is known as a Short Sale.

Short Sale:  A Short Sale occurs when a lender agrees to accept less than the principal owed as payment on a loan.  The foreclosure process causes the lender to incur certain expenses.  A lender will consider a short sale if it makes economic sense and lessens the loss when compared to a foreclosure.  However, the borrower must prove that he is unable to pay his loan and that a foreclosure is pending.  The borrower must write an explanation of the situation and provide financial information when requested by the lender.  During this process, the lender will seek to minimize its loss.  If the deal is accepted, the lender will want the borrower to be responsible for the difference between the amount owed and the property sale price.  The lender can completely write-off the loss but most likely will seek some form of relief.  They may want to borrower to sign a non-secured loan for the difference.  An alternative to receiving money is serving the homeowner with an IRS 1099-C form.  Essentially, it identifies the lender’s loss as earned income to the borrower, thus the borrower can later be taxed on this amount as income if no proof of insolvency is provided.  Whenever you may be liable for monies and/or taxes, it is prudent to seek the counsel of a competent tax attorney and/or accountant.

Deed in Lieu of Foreclosure: You can give the property back to the lender.  A DIL is essentially a transfer of the property to the lender in consideration of forgiveness of the debt.  It is sometimes referred to as a "friendly foreclosure" because, in essence, that's what it is.  You just walk away.  If there are no other liens on the title, the lender may agree to take the property back.  In a DIL situation, the lender attempts to reduce their loss because the DIL decreases the length of time involved in the acquisition and resale of the property. The lender will consider accepting a DIL if the reason for the default was beyond your control and you have been cooperative in seeking alternatives to foreclosure.  There are some advantages to this process over foreclosure.  One benefit is that the lender may waive any right to a deficiency judgment against you if the property is subsequently sold for a loss.  In other words, the lender would take the property back subject to the junior lien holders.  This will avoid the possibility of a deficiency judgment in the event the property fails to produce enough to cover the outstanding debts after it goes to auction.  A second advantage is that you avoid having a completed foreclosure on your credit bureau record.  However, a deed in lieu of foreclosure does not protect your credit.  The fact that you gave the lender a DIL may be noted on your credit bureau record.  So if you have equity in the property, this may not be the best option as you give up all rights to receive any surplus from the auction.

Service Members Civil Relief Act:  Although this was not identified as part of the list, I thought it worthy of mentioning.  Formerly known as the Soldier Relief Act of 1940, the Service Members Civil Relief Act of 2003 may allow for the reduction of interest rate to no more than 6%.  This applies to active duty military personnel who had a mortgage obligation prior to enlistment or prior to being ordered to active duty.  When a property is owned by a person who is in the military and the mortgage payments are not made, this relief act may stop foreclosure based on certain criteria.  Dependants of service members and military personnel, including reservists and guardsman, should contact their unit judge advocate (JAG) or installation legal assistance office for assistance and to see if they qualify.  Additionally, if your loan is guaranteed by the VA, you should contact the Department of Veteran Affairs to discuss your situation.  Be prepared to discuss the reason you are, or will be, in default; your current financial/employment situation; whether you or someone else occupies the property; and whether or not you wish to keep the property.

Bankruptcy: Although taking this action will not necessarily avoid a foreclosure, it will delay it.  I am not an attorney so I would recommend that you seek legal advise if you believe you might pursue this avenue.  Essentially, filing for bankruptcy places everything on-hold.  It stops all creditors from being able to take further actions against you.  There are different Chapters of bankruptcy for which most people are familiar with chapters 7 and 13.  Chapter 7 wipes out existing unsecured debt while Chapter 13 works-out a payment plan, repaying debtors usually pennies on the dollar.  The recent bankruptcy reform makes it more difficult to arbitrarily file for Chapter 7 relief.  In either case, you are still responsible for the mortgaged debt as it is secured by your home.  In a Chapter 7 situation, a lender will seek to have the house removed from what is called a "Stay" or "Automatic Stay".  If the court grants the release of the property from bankruptcy, then the foreclosure picks-up where it had left before.  In a Chapter 13, you will be required to make monthly payments to the bankruptcy court for a period of between 3 - 5 years.  Miss any payments, and the court may dismiss the bankruptcy placing you back where you were before.   

Foreclosure: Basically, this is the result of not being able to work-out any solution or just doing nothing.  It is very important to know what can happen when a lender forecloses on your home.

·         First, you will lose your home and all the money you have invested in it.

·         Second, the foreclosure goes on your credit record and may negatively impact your ability to obtain another mortgage in the future.

·         Third, in some states, you can be held liable for any loss the lender experiences in selling the home.

·         Fourth, the lender is required to report all foreclosures, short sales/settlements and DILs to the Internal Revenue Service.  You may have increased tax liability, since the IRS may view these events as forgiveness of debt.  Again, seek the counsel of a tax attorney and/or an accountant.

Typically, a foreclosure results in your being evicted from the property; you leave with nothing in hand and a foreclosure will be posted on your credit report.  This is the worst of all the options available to you.  Don't just give up and do nothing ... try something.  You have nothing to lose and it could mean the difference between a few bucks in your pocket or walking away with nothing and a foreclosure on your credit.