- 1). Recognize an upside down mortgage. This means taking an honest look at present real estate values of comparable houses to yours in your neighborhood. This can be shocking when you look at recent sales of these 'comps'. Your house may have incurred a decrease in market value recently that pushed it being worth less than you owe on the house. This is called an upside down mortgage, and it is a challenge because you essentially need to pay money out of pocket to sell your house.
- 2). Try to refinance. If the monthly payments that you're making now are difficult on your cash flow, it's still possible to refinance your home to a lower monthly rate even if the present value of the house is worth less than you owe on it. This is because government assistance is available to help people who are slightly upside down. If you're heavily upside down, this may be impossible.
- 3). Try settling with second lenders if you have a second mortgage or line of credit. Second lenders are aware that they are the big losers in the housing downfall. It's possible to have them forgive some of your debt to them, but it takes a lot of convincing - you pretty much have to convince them that you will have to walk away from the house if they don't work with you, which is the second lender's greatest fear because they will end up with nothing. If you succeed in this, the forgiven debt will be considered income on your tax return, and it will be a blemish on your credit score.
- 4). Attempt a short sale. Note that this is not a given, and it requires negotiation with the lender. It usually involves spinning the same tale as the step above where you convince the lender that failure to work with you will result in the situation that they hate - foreclosure. No bank wants an empty property on their hands. If they believe that you will leave the house and let fall into foreclosure, they will be stuck with the problem of selling it at the market rate whereas if you can convince them to short sell, you'll be doing the sales effort for them to sell it at the market rate.
- 5). If you attempt the short sale, find a realtor who is familiar with short selling. A person with such skill can be useful in dealing with primary lenders and, if necessary, secondary lenders.
- 6). If you can't refinance, settle, or short sell, contact government assistance programs. These might be able to help you with options, but it's a crapshoot.
- 7). If all attempts above fail and you can't make the payments, you have to walk from the house. Call the bank that holds the mortgage and tell them that you need to foreclose. Working with the bank on a foreclosure can make the transition smoother for everyone. This is a gray area in that the bank may not have enough staffing to deal with you until you've missed your third payment in a row, but at least make an honest attempt to let them know.
- 8). Live in the house until forced out. You can miss three payments before the foreclosure process begins, and the process can take three to six months.
- 9). Beware the deficiency balance. If you have assets of significant value and let your home fall into foreclosure, the bank may come after your assets to make up for the money you still owe them. There are some cases where it doesn't apply, however.
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