The first step is to sit down with paper and pencil (or use a spreadsheet like Excel) and detail your income and every single monthly bill or expense. Regardless of your level of sophistication, this step cannot be skipped. Sometimes overlooked expenses can be reduced. Even if nothing can be cut from your monthly spending, you should know exactly how much you fall short each month (eg, $512). The details of your monthly income & expenses will be required for many types of foreclosure alternatives. Copy your paystubs and bank statements and paperclip them to the budget. Also, write down the date the last full mortgage payment was cashed and keep running tabs on how far behind you are (35 days, 89 days, etc.)
Get the paperwork & check the interest rate & terms - are you in an ARM?
Copy your mortgage statement, all the loan documents you signed at closing and any letters from the lender. Once you have the paperwork in hand, take a look at the interest rate on your loan - homeowners who fall behind because of a suddenly higher interest rate may have the best help available. If you have an adjustable rate mortgage (commonly called an "ARM"), you may be able to get back to a more affordable payment by changing the interest rate terms. FHA loans with an ARM that increased recently may qualify for a program called "FHA Secure." The "LifeLine Refinance" program may be available.
Ask for Help!
Some of us ignore bad news, hoping things will get better on their own. However, foreclosure only gets worse when you ignore it. The earlier you talk to someone & explore options, the better - many will not be available if you wait too long. With paperwork in hand, call an attorney or a non-profit foreclosure counseling hotline as soon as possible. Maryland offers a network of non-profit housing counselors. You may be able to do a "streamlined refinance" to a better interest rate. The Department of Housing & Community Development's hotline can help direct you to these resources.
While you should ask for help early, be cautious about unsolicited offers to "help," however. In Maryland, a law called the "Protection of Homeowners in Foreclosure Act" contains rules to protect owners from being tricked into bad deals. If someone contacts you with an offer to help you "stop foreclosure" or "save your home," have the deal reviewed before signing anything.
Modify If Possible
If you faced a short-term set-back, such as a loss in income due to a layoff, injury or illness, you may be able to modify your loan or negotiate lower payments until you can get back on your feet. You will need the budget you prepared and need to talk to your lender (by yourself or through an advocate such as an attorney or non-profit foreclosure counseling agency) about changing the loan terms. Keep in mind that not all presented "solutions" will help, but in the right case modifying the loan may allow you to stay in your home.
Consider Selling Options
If you simply can't afford the mortgage, selling may be the best option. The home may need to be listed "subject to third party approval." This will likely require more work for your real estate agent, so make sure they are up to the challenge of a foreclosure sale. If your home has dropped in value or you won't get enough to pay off the mortgage, this is where "short sales" come into play. In a short sale, the lender agrees to take less money than you owe and release its mortgage on the property. Caution should be used - even if the lender agrees to the short sale, you want to make sure that you aren't personally liable for the rest of the mortgage debt. Also, keep in mind that getting a lender's approval can take months, so the sooner a home is listed, the better.
Negotiate a Deed in Lieu
If all else fails, you can ask the lender to take the property rather than going through foreclosure. The document that gives the lender the ownership of the property is known as a "deed in lieu of foreclosure" or more briefly "deed in lieu." Again, you or your representative should try to ensure that the lender will not hold you personally liable for the full mortgage debt after the property switches hands.