What to do when foreclosure is looming?

From USA Today:

Foreclosure hurts long after home’s gone, so cut a deal while you can

If you’re lying awake at night, fretting about whether you’ll lose your house to foreclosure, you may not be the only insomniac on your block.

More than 2.1 million Americans with home loans missed at least one payment last year, according to the Mortgage Bankers Association. Even more troubling, the rate of new foreclosures hit a record.

The problem is likely to get worse. As adjustable-rate mortgages adjust to higher rates, many borrowers are finding they can’t afford their payments. And the collapse of the subprime market has made it harder for those with tarnished credit to refinance.

But be aware: Even if your mortgage has become an intolerable burden, letting the bank foreclose could lead to a lifetime of hurt. Losing your home is just the beginning. A foreclosure will wreck your credit report for years, making it impossible — or at least extremely expensive — to buy another home, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. If the proceeds from the sale of your home don’t cover your loan, your lender might sue you to recover the unpaid balance.
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If you’re suffering a temporary financial setback, your lender may offer programs that will help you get back on track. They include:

• Forbearance. This is an agreement that lets borrowers make a reduced payment, or none, for a specific period. You might have to make larger payments once the crisis has passed. To qualify, you might need to show that you’re expecting a bonus, a tax refund or other income that will let you catch up.

• Reinstatement. You agree to pay the full amount of your missed payments by a specific date. Reinstatement is sometimes combined with forbearance.

• Modification. Your lender agrees to change the terms of the loan to make payments more affordable. Your lender may agree to add missed payments to your loan balance or extend the term of your loan, reducing the size of your payments.
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you’re in a home you can’t afford, loan forbearance isn’t going to solve your problem. But even if you have to move, you can take steps to avoid foreclosure:

• Put your home up for sale. This may be the best choice, Walters says, if you’ve been in your home for several years and have built up some equity. If your local real estate market is strong, your lender may agree to forgo payments until the house is sold, says John Jones, a financial specialist at ComPsych, an employee-assistance program. The proceeds from the sale might cover your mortgage and selling costs.

• If you have no equity or your local real estate market is depressed, ask your lender to consider a “short sale.” In a short sale, the lender agrees to accept the proceeds from the sale of your home, even if they don’t cover the amount you owe.

• Ask your lender to accept a deed in lieu of foreclosure. If you can’t sell, your lender may agree to take the deed to your home and cancel your debt.