Banks Pay Delinquent Borrowers $35,000 For Short Sales

In an effort to cut their losses, banks are paying some struggling homeowners as much as $35,000 to sell their homes before they end up in foreclosure. The deals are aimed at incentivizing homeowners who owe more on their home than it is worth and who are seriously delinquent on their payments to sell their homes in a short sale.

In short sales, homes are sold for less than what is owed and the bank forgives the excess debt. Banks

have been reluctant to approve such deals in the past -- since they take a loss on the home -- but in certain cases, it's become a much better proposition than letting the homeowner fall into foreclosure.

This new approach by the banks has startled plenty of homeowners, according to Elizabeth Weintraub, a Sacramento-area real estate agent who specializes in short sales.

"Initially, the homeowners are skeptical," she said. "The bank may have already turned down their request for a modification. Then, one day, they call and say, 'Let us give you some cash.'"

When Chase Mortgage (JPM, Fortune 500) told Angelique Pierce, that she would receive a check for $25,000 if she sold her house, she couldn't believe it.  "I got the offer in the mail," said the Rancho Cordova, Calif. resident. "I called my bank to ask if it was real."

After Pierce became disabled a few years ago and had to stop working work, she fell behind on payments on both her first and second mortgages, valued at $250,000 and $50,000, respectively.

Now, she's trying to sell her three-bedroom ranch for just $95,000 -- almost half of the $179,000 she paid for the place in late 2002.

Foreclosure free ride: 3 years, no payments

From the bank's point of view, the offers make sense, according to Tom Kelly, a spokesman for Chase Mortgage, who would not comment on Pierce or other individual cases. "The first choice is a modification but if that's impossible than a short sale is a faster, more efficient solution," he said.

For the banks, foreclosure has become an increasingly difficult and expensive option. Homeowners have learned to fight the banks tooth and nail, dragging out cases for years.  

And as the cases drag, expenses grow. Homeowners not only stop paying their mortgages but they stop paying property taxes and conducting normal maintenance as well. Roofs, siding, plumbing and other parts of the home deteriorate and the property loses value. By the time banks take possession, they're out tens of thousands of dollars.

Foreclosures: America's hardest hit neighborhoods

"I've seen a lot of foreclosures for sale where it would cost a lot more than $20,000 to get them into condition to sell again," said John Hayton, a short sale specialist in Orlando, Fla, who has had a number of clients receive offers from the banks. 

Short sales also command higher prices than foreclosed homes. In December, foreclosed properties sold for an average of 22% less than conventional sales, while the discount for short sales was only 14%, according to the National Association of Realtors.  All that has been true for years, but it is only lately that these outsized incentives, which Bloomberg recently reported on, have surfaced.



Sellers are more cooperative when they're going to receive a five-figure check for their troubles.

Nick Chaconas, an agent with discount broker Redfin, wondered why one seller was so anxious to sell their home. "Since I represent the buyer, I didn't even know about the incentive until the closing," he said. 

It turned out that the seller's bank was writing her a check for $30,000.   Whether sellers can expect incentives from their banks depends on multiple factors, including where they live.
Wells Fargo (WFC, Fortune 500) limits its offers to certain states, such as Florida, where the foreclosure process can be lengthy, according to spokeswoman Veronica Clemons. The bank has paid $10,000 to $20,000 to borrowers who short sell or transfer their title to Wells via a deed-in-lieu.

What the foreclosure settlement means for you

Bank of America (BAC, Fortune 500) had a pilot program in Florida that paid incentives of $5,000 to $20,000 for sales that were initiated between Sept. 26, 2011 and Nov. 30, 2011 and close by the end of this August. The amount of the incentive is based on 5% of the unpaid balance, with a $5,000 minimum and $20,000 maximum. 

Jumana Bauwens, Bank of America's spokeswoman, called it a "test-and-run program" that may be expanded to other states.

The offers are not always a panacea for homeowners struggling to pay the bills, however.

Pierce, for example, has not been able to make hers pay off. She had a buyer but her second mortgage holder refused to go along with the deal unless it got a share of the $25,000 she was being offered by the bank. She said that the bank balked at the deal and the sale was cancelled.

She's looking for another buyer, but it's up in the air if Chase will honor its original offer if the second mortgage holder won't cooperate.

Top 20 Frequently Asked Questions on Florida Short Sales and Foreclosures

1. Are foreclosure websites like RealtyTrac accurate?

"I signed up a month to try it out and discovered that homes listed under the bank owned category were often nothing more than contractor or HOA liens," said Dickenson. "The data is seriously flawed in my opinion."


2. What is a short sale?

A short sale occurs when a borrower owes more than the home is worth and submits a request to the lender for a discounted payoff.


3. What is a lis pendens?
A lender will file a lis pendens (lawsuit) against a borrower typically after 3 months of non-payment. When the suit is filed, the borrower is now in the “pre-foreclosure” phase.


4. What is the best way to buy a Florida foreclosure?

If the home is listed on the MLS, find a good realtor who knows the process and use him as your guide. If the home isn't listed on the MLS, the borrower will need to be contacted because they are in control of the property until the home is foreclosed. Keep in mind that borrowers in default may be very difficult to get in touch with.


5. Can a buyer contact the bank to buy the home after the lis pendens is filed?

Only the deed holder has the authority to sell the home prior to a final judgment of foreclosure. The lender will not talk to any third party unless the borrower has given the individual written authorization. Another option is for the lender to sell the note, but most banks don't want to be bothered with a single small transaction.


6. Is the bank obligated to accept the contract price agreed to?

No. If an owner accepts a short sale offer, the contract MUST be contingent upon the lenders agreement to a discounted payoff and there is absolutely NO guarantee the lender will agree. The lender will hire a real estate agent or appraiser to perform a "broker price opionion" (BPO) to determine fair market value. Be prepared for a counter from the lender if the offer price is low.


7. What does the borrower need to supply to qualify for a short sale?

The bank will require a lot more documentation to discount the loan compared to what was supplied to obtain the loan. The lender will typically request two years tax returns, the last 3 pay stubs, a financial statement, four months of bank statements and a hardship letter as a minimum. Banks employ forensic accountants to make sure the borrower is in true financial hardship and keep in mind that a lot of people borrowed money for homes they couldn’t afford using no-doc stated income loans. A borrower who misrepresented income may refuse to provide the required documentation if it proves fraud. The buyers contract should contain a right to cancel clause if the seller fails to submit a complete short sale package to the lender within 10 days.


8. The offer and short sale package was submitted over four months ago and we haven't received a response. What’s going on?

Banks are overloaded with short sale requests. If a lis pendens has not been filed, the file is at the bottom of the banks pile. If a final judgment of foreclosure has been filed, this means a court date has been set and the home will be sold at auction in less than 30 days. In this case, the file is at the top of the pile. If the lis pendens is filed, it's in the pipeline and the buyer should be prepared to wait at least 4 months. A good negotiator should follow up with a buyer every two weeks and buyers will need to be patient.


9. Can a Seller accept more than one short sale offer and submit it to the bank?

The owner can accept a backup offer, but the new Florida FAR/BAR short sale addendum does not allow the seller to submit backup offers to the bank until the contract in first position is cancelled. Make sure your agent is using the most recent contract package and have an attorney review all documents.


10. Who is taking care of the house during the four to twelve months the buyer is waiting for the bank to approve a Florida short sale?

Nobody. Typically, the seller has vacated, the power is off and there is a good chance mold is growing in the home. The pool will turn green and black algae will burrow into the finish. Be prepared for the seller to strip the appliances, ceiling fans and light fixtures. Even worse, some owners will destroy the home out of anger. Make sure the contract provides a right of cancellation.


11. Should a buyer conduct a home inspection after the Seller accepts the offer?

No. It's best to trigger all key dates (inspections, mortgage commitment, etc) from the date the bank accepts the offer, not the seller acceptance. It's not uncommon for a house to start growning mold after sitting four to twelve months without air conditioning in Florida.


12. What happens if there is a first and second mortgage?

If there are two different lenders, the lender in first position controls how much is paid to the second lender. The second lender must agree to the amount and the deal is dead if they don't. If the second lender doesn't agree, the buyer has two options; (1) buy the second position note or (2) let the first lender foreclose.


13. Is there anything else that can kill the deal while the buyer is waiting for the bank to approve the short sale?

Yes.

A. The IRS can enter the picture and they always take first position (in front of the lenders).

B. The borrower could file bankruptcy.

C. The HOA could foreclose if the owner is delinquent.

D. The bank could refuse to pay the full amount of the delinquent HOA fee, but the buyer always has the option to pay.


14. Can the home be purchased from the court at foreclosure auction?

Yes, but court auctions are AS IS and access to the home for inspection purposes may be impossible. The buyer should also hire an attorney to review the title prior to auction day. Buyer beware!


15. The house was sold by the court at public auction and the bank bought it back. Can it be purchased now?

Yes. The bank has foreclosed and all liens (HOA, etc) have been eliminated. The bank will appraise the home to determine fair market value and it will be (1) listed on the MLS by a Florida bank owned real estate agent or (2) sold in a bulk offering package to investors or (3) listed with an auction company. The home is now an REO (real estate owned) and will be sold AS IS. There is a strong demand for Florida REO homes and they are usually under contract within days. It's not uncommon to have multiple offers and bidding wars on REO homes.


16. Who pays the realtors commission in a short sale?

The bank will pay the real estate commission. If you have concerns, add a clause stating the sale is contingent upon the lender paying the commission and any unpaid property taxes and liens.


17. Will the borrower be liable for the mortgage deficiency?

There is no guarantee the lender will waive the deficiency. Some lenders require unsecured notes from the borrower while others waive the deficiency in writing. It depends on the bank, the borrower’s financial situation and how good of a negotiator you hired. Dickenson recommends retaining an attorney with a proven track record to negotiate the short sale.


18. Can the house be rented while the borrower is in foreclosure?

Yes, but the owner must disclose the home is in foreclosure. If the lease is executed prior to the filing date of the lis pendens, the foreclosing lender must honor the lease and has the right to evict with 90 days notice. The lender will usually offer the tenant “cash for keys” to vacate after they take possession. If the lease is executed after the lis pendens is filed, the bank has the right to evict the tenant with 30 days notice.


If the home is in a community with a homeowners association (HOA), the board probably won't approve the lease if the owner is delinquent on HOA fees. Delinquent owners should consider leasing the property and paying the HOA from rental proceeds. "It's always better to have a tenant in the house rather than letting it sit vacant with the air conditioning off," said Dickenson.


If the property is a condo hotel, the rental management agreements usually contain a clause allowing the association to use rental proceeds to pay delinquent fees.


19. Can the HOA foreclose if the borrower is delinquent on HOA fees?

Yes, and it's a fairly simple process because there is usually no defense in this situation. "HOA's believe it's easy to rent homes once they take possession, but who's going to rent a house that could be foreclosed any day by the lender," said Dickenson.


20. Is there a defense against the lenders foreclosure action?

Click the free book Florida Defense Secrets in the right sidebar and then retain a bankruptcy attorney to discuss your options.

HAFA Increasing Short Sale Success

Mortgage Forbearance- A Break you Can't Afford?

Forbearance now has the backing of the White House, but lowering or halting payments for now may simply delay the inevitable. Weigh your options carefully.

By Liz Pulliam Weston - MSN

If you're struggling to pay your mortgage, your lender may offer you forbearance. Think twice before you take the deal.

Can you afford mortgage forbearance?

Forbearance is a lender-approved reduction or elimination of your payments for a short time, usually a few months. Until recently, lenders made forbearance offers voluntarily, often in response to a temporary financial setback, such as a layoff, and the deals typically required borrowers to catch up on the missed or reduced payments within a year.

Under the Obama administration's recently announced expansion of the Home Affordable Modification Plan, or HAMP, lenders in the program will be required to offer forbearance to unemployed homeowners for at least three months and in some cases up to six months. Payments must be reduced to 31% of borrowers' incomes.

The details:

• Homeowners must meet HAMP eligibility requirements, which include owner occupancy (no rentals or investment property), a loan balance below $729,750 and an origination date before Jan. 1, 2009.

• Homeowners must ask for forbearance.

• Homeowners can't be more than three months behind with their payments. (They can be current and request forbearance; they just can't be more than 90 days overdue.)

• Homeowners must provide proof they're receiving unemployment benefits.

If a homeowner finds a job within the forbearance period and her regular payments would exceed 31%, she must be considered for a permanent loan modification.

Most such modifications so far have involved reducing the loan's interest rate and/or extending the loan term up to 40 years, but the Obama administration is now offering incentives to encourage lenders to forgive portions of some borrowers' loans.

If borrowers who got forbearance don't qualify for a modification that includes a reduction of their principal, though, they're expected to pay back the difference between their reduced payments and their regular payments, said Brian Sullivan, a spokesman for the U.S. Department of Housing and Urban Development.

"These mortgage reductions are not forgiven," Sullivan said. "They are repaid unless the borrower qualifies for a principal write-down."

If borrowers don't find employment by the end of their forbearance, they may be considered for foreclosure alternatives such as a short sale (in which the lender accepts the sale proceeds as full payment for the loan) or deed in lieu of foreclosure (which allows a homeowner to hand back the house keys in order to avoid full-blown foreclosure).

If your situation isn't too dire, it's possible that forbearance -- either the kind lenders offer voluntarily or the kind required under HAMP -- could get you back on track financially. But forbearance might not work, and it could leave you even worse off.

Here's what you need to consider:

Forbearance typically hurts your credit. When you don't pay lenders what you originally owed them, they typically take their revenge by reporting you to the credit bureaus as making late or partial payments. That can trash your credit scores.

That's certainly been true for the forbearance that lenders have been offering voluntarily, as well as for loan modifications, and it's likely to be true under HAMP forbearance as well, said real-estate expert Ilyce Glink, the author of the book "Buy, Close, Move In!"

When HAMP was first announced, "we were told loan modifications wouldn't hurt people's credit," Glink said. That turned out not to be true, she said, and signing up for loan modifications "destroyed a million people's credit."

How much damage you might suffer depends on how high your scores were to start with, with higher scores taking bigger hits. That's why you shouldn't seek forbearance if you have other ways of paying your mortgage, such as tapping savings.

But you also should be realistic if you're in trouble, because every option that would save your wallet some pain is likely to inflict some damage on your credit history and credit scores, Glink said. Forbearance would certainly have less of an impact than losing your home to foreclosure.

Forbearance may not be enough. Unemployment can last a long, long time, particularly in this recession. Half of the people who are unemployed have been without a job for 19 weeks or more. Even if you should land a job, you still may not be able to afford your mortgage, and there are no guarantees a mortgage modification would help.

"The first question you should ask yourself is, should you be trying to save this house?" said Glink, who runs ThinkGlink.com, a personal-finance site. "Can you catch up? You may think keeping your house is your top priority, but should it be?"

Forbearance may just delay the inevitable. In fact, some housing experts say the real benefit of the HAMP expansions won't be in preventing foreclosures as much as delaying them, since spreading foreclosures out over a longer period may reduce their impact on the fragile housing market.

But if you're likely to lose your house in the end, you may want to stop throwing good money after bad. Instead of making lower payments, you may be better off financially simply making no payments, saving your money and trying to arrange a short sale or letting your lender foreclose.

That's a hard pill for many to swallow, and you shouldn't consider it until you've weighed all your options, as I wrote in "Are you foolish to pay your mortgage?" But if you're deeply "underwater" (owing far more than the house is worth) and your lender isn't helping with a permanent loan modification, letting the house go may be the best of bad options.

If you're struggling, you should:

• Get help. Talk to a HUD-approved housing counselor about your options. You can find referrals here. These counselors are free and are a far better initial option than trusting law firms or others who demand big upfront fees (and who may just sign you up with the same programs as the HUD counselor).

• Make the right decision for you and your family. That could mean fighting to keep your house with everything you've got. It could mean throwing in the towel. Or it could mean something in between. Whatever decision you make, you'll have plenty of company as millions of other homeowners face the same struggle.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

Short Sales are the New Foreclosure

A new federal program could help those who are destined to lose their homes to at least avoid foreclosure -- and the repercussions of that drastic step.

By Sally Herigstad-- MSN Money

Steve and Debbie Martin are losing their home. That's for sure.

Foreclosure alternatives

The only question is whether it will be in a short sale or a foreclosure. They've found a buyer, who is offering less than what they owe. The Martins just have to get the bank to accept the offer.

In the past, that's been a tall order. Since the housing meltdown began, short-sale offers have often taken months to get a response from overwhelmed lenders. Even then, there have been no clear guidelines about what kinds of offers are acceptable or about how to handle second mortgages that could easily derail the process.

Industry experts estimate that less than half of short-sale offers have been accepted, and many real-estate agents have avoided showing these properties altogether. Ultimately, most of the homes go into foreclosure .

The short sale option

But if the Martins can hold on until April, a new federal program might help.

Starting April 5, lenders in the Home Affordable Modification Program must offer borrowers the option of a short sale, including the minimum amount needed for an acceptable offer, if their mortgage doesn't qualify for a modification.

Once a homeowner applies to list his home as a short sale, lenders must respond to offers within 10 days. The program also offers $1,500 to homeowners to help them move, $1,000 to loan servicers to cover the cost of paperwork and up to $3,000 in incentives to secondary lenders who might otherwise reject an offer.

How you lose your home matters

The Martins bought their home in 2003, when they needed a larger house for themselves, their three grown children and one grandchild. Steve and Debbie made the down payment, and all five adults signed on the loan. Everyone chipped in on the mortgage payments.

The Martins figured that when their kids moved away, they would sell the house and all would share the profits. Then property values in the Pacific Northwest plummeted. As the nest emptied, Steve and Debbie started having trouble paying the mortgage.

Now the Martins can no longer sell the house even for the amount they owe on it. But they don't want to just walk away. They feel a moral obligation to try to pay back their loan, and they don't want to trash their and their children's credit scores. The Martins tried everything before asking the bank to accept a short sale. Steve started taking one of his pensions early in an effort to make ends meet, but it wasn't enough. "We tried to refinance," he said. "We tried that with three institutions, and they all said no because there were too many people on the mortgage. We tried loan modification and had the same issue."

Millions of people like the Martins are finding it hard to hang on to their homes as the Great Recession squeezes both household income and housing values. And many others who owe a lot more than their houses are worth may just want out. Walking away, however, is a terrible choice -- one you could regret for years.

Here's why:

You could get hit with a deficiency judgment. It's common to assume that if you walk away from your home, the bank can't come after you for more money, because the loan was attached to the house.

But that's not always true. In some states, lenders can obtain a deficiency judgment for the difference between what you owed and what they got from selling your house.

Florida is one of those states. "No homeowner should walk away," says Rashmi Airan-Pace, a Florida attorney who specializes in mortgage modifications and foreclosure defense. "Deficiency judgments are very damaging."

Airan-Pace points out that lenders, for example, can seek to garnish wages or place liens on other properties.

Other states, including California and Arizona, are nonrecourse states, which means that laws there prohibit such judgments. You still have to be careful, though; some lenders get borrowers to sign papers obligating them to pay deficiencies anyway.

Foreclosure can ruin your credit scores for up to 10 years. When it comes to the effect on your credit scores, having a few late bills is to foreclosure what having a leaky faucet is to burning down the house.

"When a foreclosure is filed against a property owner, that person's credit will go down 100 points," Airan-Pace says. "At the foreclosure sale, it goes down another 100." She estimates that a short sale would do about one-quarter as much damage to your scores. And though you can start pulling up your credit scores substantially from a short sale or a spate of late payments within a couple of years, a foreclosure can affect your credit history for a decade.

First, do all you can to keep the house

Before you think about letting your home go, make sure you've exhausted every other possibility.

If you can save your home by working extra hours, staying on a strict budget or taking money out of savings, you should consider it. (In general, don't touch your retirement accounts, however.) If you just want out because the value is down, remember that a house is still a place to live, regardless of what the market says it's worth. You would also be wise to consult a credit counseling organization, such as the National Foundation for Credit Counseling, or hire an attorney.

According to the nonpartisan Urban Institute, borrowers facing foreclosure are 60% more likely to hold on to their homes if they receive counseling. When you hit trouble, the first step is to see whether you qualify for federal programs that help you refinance your home at a lower rate or reduce your mortgage balance. Be patient. And be prepared for lots of paperwork. The Martins say they have faxed more than 80 pages at a time to their lender.

Sam Hussain of ClearPoint Credit Counseling Solutions in Modesto, Calif., says that people often get frustrated when they have to fax the same paperwork more than once. "That's reality," he says. "Ask for the mailing address, and use certified mail." Hussain also recommends you use a notebook to make a conversation log through the process. Write down the name of every person you talk to, the date you spoke and what was said.

It should go without saying that getting your legal advice from scam outfits that advertise in spam e-mails or on utility poles is a bad strategy. As Lee Jones, a spokesman for the Department of Housing and Urban Development in the Northwest, says: "They fold up in the night like a lawn chair and take your money with them."

It's also good practice to steer clear of well-intentioned people who are out of their field. Taking advice from friends, relatives and even your real-estate agent can be a costly mistake.

A credit counselor or attorney can be helpful if saving your home proves impossible and you seek to complete a short sale or deed in lieu of foreclosure. Keep in mind that banks will want to know that you tried every other avenue first.

How to get help losing your home the right way

A new federal program, Home Affordable Foreclosure Alternatives, encourages banks to accept short sales by offering them financial incentives to do so. It offers sellers incentives, too.

Homeowners win because:

• They won't get stuck with a deficiency judgment. Under the program, homeowners are released from all obligations.

• They can receive $3,000 in relocation expenses.

• They can't be charged any fees to participate.

Creditors win, too, because they don't inherit a vacant home to maintain. As big as the losses in short sales can be, the losses from foreclosure can be even bigger -- by some estimates, as much as 60% of what's owed on the mortgage.

Secondary lenders, who often stand to get nothing in foreclosures, can receive up to $6,000.

You may qualify for the foreclosure-alternatives program if:

• You have tried unsuccessfully to get a mortgage modification through the Home Affordable Modification Program .

• The property is your principal residence.

• You got your first mortgage loan before Jan.1, 2009, and it is guaranteed by Fannie Mae or Freddie Mac.

• You are behind on your mortgage or will be in the foreseeable future.

• You owe no more than $729,750.

• Your total monthly mortgage payment is more than 31% of your income before taxes.

The foreclosure-alternatives program is set to expire Dec. 31, 2012. Some critics predict that it will be as disappointing as the loan-modification program, which was launched in March 2009. Out of millions of distressed homeowners, just 170,000 had received permanent modifications as of the end of February, according to the Department of the Treasury and HUD. (Many more modifications are being offered or are in the trial phases.) The median decline in monthly mortgage payment was about $500.

Will the new program be any better?

"It's half right," says Mary Tootikian, the author of "Stunned in America: Sub-Crime Mortgage Crisis." "The intent of it is good." She worries, however, that the new program's application process will allow lenders to find out borrowers' incomes and assets. "After they go through this fact-finding mission and they find out you have assets to go after, they don't have to let you do a short sale," she says.

Arian-Pace, the Florida attorney, is more optimistic. "The frustration of short sales is the timing of it all, getting banks to approve it," she says. "You often lose the buyer in the process. I'm hoping it's a step in the right direction. Really, it's going to come down to how the banks implement it."

Supreme Court: Order Requiring Mediation

Florida created a Task Force on Residential Mortgage Foreclosure Cases in March of 2009. The task force issued a Final Report on August 15, 2009 recommending all residential foreclosure cases be referred to mediation.

On December 28, 2009, the Supreme Court of Florida approved this recommendation and an Administrative Order was signed. The Order is to be executed in each judicial circuit. The Order, and model mediation forms for use in this new statewide program, can be found by clicking HERE. The Order provides that only Florida Supreme Court-certified mediators trained in residential foreclosures may be assigned to mediate these issues. Given the immense time and cost of this new program, outside help has been sought to coordinate the program in the various judicial circuits.

Florida is a Judicial foreclosure state.

Facing Foreclosure? 9 options

Check your options, get help, be realistic -- and most of all, don't dawdle.

Real estate markets are slowing. Interest rates are ticking up. And the phones are ringing at ByDesign, a Los Angeles-based credit counselor, as homeowners start to panic about not being able to make their mortgage payments.

"The number of people asking for appointments to talk about foreclosure is definitely up," said Susan Ulaga, the nonprofit service's senior vice president of counseling. Rising rates "are really putting a crunch" on homeowners with adjustable-rate loans.

Nearly a quarter of the nation's mortgages have rates scheduled to reset this year or next, which means higher payments for millions of homeowners. How many will default isn't known, but the Mortgage Bankers Association, which tracks delinquencies and foreclosures, expects a "modest" uptick in both by the end of the year.

If you're in danger of falling behind on your mortgage, or if you're already delinquent, it's important to know what's ahead and what your options are. Usually, the faster you move, the more choices you'll have about your financial future.

The timeline

30 days: Your troubles actually start as soon as you miss a single payment. Lenders may not contact you until you've skipped a second payment, but most will report the first late payment and every subsequent delinquency to the credit bureaus. Even a single late payment can devastate your credit score, the three-digit number that lenders use to help gauge your creditworthiness. Each subsequent "late" further decreases your score, making it more difficult and expensive to get a loan or a refinance that might help your situation. In addition, lenders typically tack on late fees of 5% or so for each missed payment.

90 days to one year: Eventually, if the payments aren't made, the lender will file a "notice of default" with a local courthouse and send you a letter saying that the foreclosure process will start unless you make good the missing payments.

How quickly the notice is filed depends on the individual lender. Some hold off if you contact them to work out a payment plan or otherwise explain your situation. Others are more aggressive and start the process as soon as possible to try to protect their investment.

"They may do it as early as 90 days, or as late as a year," explained Anthony Hsieh, president of LendingTree.com. "It really depends on the lender's temperament."

Usually, this notice means that the amount you owe has shot up as well, since the lender typically adds substantial fees to cover its legal costs.

The notice of default "is a big threshold," Hsieh said. "Once you get into that state, it's a whole different world. Your options are fewer."

The notice of default is generally picked up by the credit bureaus, further depressing your credit score and making refinancing the loan extremely difficult.

(In addition, the notice tips off scam artists that you're in trouble and may be vulnerable to various "equity skimming" schemes. One common ploy: The scam artist promises to take over your payments, but instead rents out your house and keeps the rent payments as pure profit. The home goes into foreclosure, your credit is trashed and you've lost any equity you had in the home.)

90 days more: Borrowers typically have 90 days from the notice of default to make up the deficit before the lender sends out a "notice of sale," which sets a sale date for the house (typically within the next 15 to 30 days).

Some lenders will allow you to keep your original loan if you can make up the missing payments plus any late fees and legal charges. Others will insist you refinance with another lender. You can also halt the foreclosure, at least temporarily, by filing a lawsuit or filing for bankruptcy. For either legal option to work, you'll have to be able to come up with a payment plan to fix the deficit.

Your options

Lenders today typically offer a variety of solutions for people who have fallen behind on their mortgages. Among them:

Temporarily reducing or waiving payments.

Setting up short-term repayment plans to help you make up the deficit.

Adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.

If you have certain types of loans, you may have even more options. If you have a mortgage insured by the Federal Housing Administration, for example, you may qualify for an interest-free (and payment-free) loan to get your mortgage current. The money doesn't need to be paid back until you pay off the mortgage or sell the house.

If you can work out a solution with the lender quickly enough, you can contain or even avoid serious damage to your credit. That's among the reasons housing experts typically urge you to call your lender as soon as you know you'll have trouble making a payment.

This is good advice, but trickier than it may seem at first, for two reasons:

Lenders can make it tough to get to the right people. The folks you want to talk to are in the "loss mitigation" department. But many lenders don't routinely route borrowers to that department until they've missed several payments. Until then, you might be dealing with the lender's collections department, which typically offers one option: Pay up now. If you're serious about keeping your home, you may have to really push to get to right people.

"The loss mitigation department (is) where the options are really going to open up," ByDesign's Ulaga said.

You have to be able to make the payments. If you agree to a lender's "workout" or "loan modification" solution and then fail to make the agreed-upon payments, you'll be in a world of hurt. At best, you'll have "a lot fewer options the second time around," Ulaga said. More likely, Hsieh said, the lender will simply accelerate the foreclosure process.

This can be a big problem if the financial crisis that caused you to fall behind isn't over. If you don't know where you're going to get the money to make the payments, trying to work out a solution with your lender will be tough.

"If you're honest like that, (lenders) are not going to want to work with you," said New Jersey bankruptcy attorney John Amorison. "If you're dishonest, you breach the agreement."

That's no reason to hide from your lender or ignore its letters, Hsieh said. Even if you can't work out an agreement, keeping in contact is usually the right choice: "At least you know where you stand."

Filing a lawsuit or bankruptcy carries similar risk: If you don't have the money to make the payments, the foreclosure can proceed, and you may have further damaged your credit score.

9 steps to getting out of this mess

So what to do? First, you'll need to take a hard, clear-eyed look at your financial situation. To that end:

Make a budget. Sketch out a spending plan for the next several months, including expected income and expenses. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In certain very limited circumstances -- such as when you are absolutely sure your financial hardship will be short-lived -- it may make sense to skip payments on some bills so you can pay your mortgage. Read "How to not pay your bills" to learn about the consequences that may follow. Another option: borrowing money from friends or family, or tapping retirement funds. Do the latter only if you're convinced you can make future payments; you don't want to drain your retirement funds if you're only going to end up losing the house.

Consider getting help. Legitimate credit counseling services, those associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies, typically have housing counselors that can help you evaluate your options. Or you can find a housing counseling agency approved by the Housing and Urban Development Department by calling (800) 569-4287. If you have a Veterans Administration loan, you can call (800) 827-1000 to get a referral to a financial counselor.

Check your refinance options. If you have equity in your home, your credit rating is relatively intact and your lender hasn't yet filed a notice of default, you may be able to get another loan with more affordable payments. An experienced mortgage broker, preferably one affiliated with the National Association of Mortgage Brokers, can let you know your options. Be cautious about jumping into another risky loan, though: adjustable, interest-only or "option" mortgages might just put off the day of reckoning and you could find yourself facing even higher payments down the road.

Be realistic. Many times, Amorison said, people struggle to hang on to a house that they simply can't afford when they'd be far better off without it.

"People are just too tied to their homes," Amorison said. "It's just property."

That may seem harsh, but it's far better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure.

Get organized. If you are going to try for a loan modification, you'll need to prepare a small mound of documentation. The lender will specify what it wants, but typically you'll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a "hardship letter" that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.

You may also want (or be required) to provide a market analysis of your house, Ulaga said, to document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell.

Leaving home

If a loan modification or refinance isn't possible or feasible, your options come down to these:

Sell the house. If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You'll preserve what's left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future.

Offer a deed in lieu of foreclosure. If you can't sell the house for what you owe, but you're not deeply "upside down" on your mortgage, this may be an option: you propose handing over the deed to your home and your lender agrees to release you from your mortgage. This usually keeps you from having to pay any deficit that might be owed on the property, while the lender avoids further legal costs related to a foreclosure.

Lenders can't be forced to accept a deed, however. Typically, lenders require that the borrower make "a really good effort" to sell the home first, Ulaga said, and show that their delinquency was due to "unavoidable hardship" before they'll agree to a deed in lieu of foreclosure.

Negotiate a short sale. If you owe substantially more on your home than it's worth, you may be able to get the lender to accept less than it is owed by negotiating a "short sale." You essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit.

A short sale can further damage your credit scores, often showing up as a "settlement" that indicates you paid less than you owed. You may also face an IRS bill on the unpaid debt, which is generally considered income to you. A skilled negotiator may be able to avoid these consequences or at least minimize them, so you may want to consider getting an experienced attorney's help.

Allow the foreclosure to proceed. This is generally the worst choice. In some states and in some circumstances, the lender can even go after you in court for any deficit between what the house eventually sells for and what you owe. An attorney or housing counselor can let you know if that's a possibility.

Even if the worst happens, though, the damage to your financial life needn't be permanent. If your situation improves, you may be able to get another mortgage, at a reasonable interest rate, within a few years. For more details, check out "Bounce back fast after bankruptcy" for suggestions on how to rebuild your credit after financial disaster.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Use a Short Sale to Escape Foreclosure

If you owe more than your house is worth and can't afford your payments, you might be able to sell it for less than you owe -- without having to pay the lender the difference.

If you can no longer make your mortgage payments and your home is now worth less
than you owe on it, foreclosure may not be your only option.

A short sale, in real-estate terms, is the sale of a house for less than what the owner still owes on the mortgage. If the lender agrees to a short sale, the rest of the homeowner's debt typically is forgiven. Lenders sometimes agree to the procedure in order to take a small loss and avoid the lengthy and costly foreclosure process.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label.

Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here's how:

The seller gets out of the mortgage liability without facing bankruptcy.

The buyer gets the home at a reduced price.

The lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too.

"The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process," says Stuart Wilson, a real-estate agent with Paragon Real Estate in San Francisco.

A market saturated with foreclosures can cost lenders billions -- and as much as $50,000 per foreclosure -- according to a study by the congressional Joint Economic Committee.

A buyer's dream

For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale can make a lengthy home-buying process longer and more arduous.

Wilson, who has represented both buyers and sellers in short-sale deals, advises working with an agent who's familiar with short sales.

He also suggests that buyers looking to negotiate a short-sale deal come armed with enough documentation to convince the lender that settling for the lower price is the best option.

Who should consider a short sale?

"When you go into a short sale, you have an institutional lender, and it is an anonymous entity," Wilson continues. "You don't get a chance to talk to these people, you don't know what their guidelines are, you don't know what their time frames are, and you don't know if your contract will be approved in six weeks or six months. It's a real crapshoot."

Lenders are most concerned with the financial situations of the seller when they ultimately make their decisions. If a seller can handle the mortgage payment, there's no motivation for the lender to let the seller out of the mortgage at a lower price.

"A lot of lenders aren't even going to consider a short sale unless it seems like (the homeowner) is in financial distress," says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana, Calif.

Also, if the home has a second mortgage with another institution, a short sale is less likely to be approved, since that second institution would have to agree to forfeit all or part of the money it's owed.

Last gasp only

While getting a lender to agree to a short sale may seem like an answer to the prayers of a homeowner who wants to unload a house, it's not a good move if you're merely looking to find a new place. It's generally a last-ditch effort when the only other option is foreclosure.

Should you go for a short sale? It depends on how deep a financial hole you're in and how likely it is you'll be able to overcome those financial difficulties.

"If they're just having a short-term problem -- short-term disability or maternity leave or layoffs, but they have good prospects to find something soon and they can weather the storm and hold on to the profit through that -- obviously they wouldn't want to think about a short sale," says Lohrenz.

"But if the choice is foreclosure or short sale, generally a short sale is going to be a better idea."

Before you think about asking your lender to consider a short sale, it would be a good idea to get your paperwork lined up.

Be ready to show the lender you are serious about your situation. Get together a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

3 critical safeguards

If you're considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.

1. Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.

"If they owe $300,000 on the house and the short sale is for $280,000, is there any possible way that the lender's going to come after them for the $20,000?" Lohrenz says. "Most lenders will put that in the agreement that they're not going to come after the deficiency."

2. Protect your credit rating. Ask the lender how it will report the short sale on your credit report.

"Most of the time, a short sale shows simply that a debt is satisfied," says Lohrenz. "But theoretically, a short sale could reflect on the credit report as 'settled for less than the full balance.'" Such a designation is a negative mark on your credit report, though it wouldn't hurt your credit as much as a foreclosure would.

3. Get professional tax advice. Short sales often have tax repercussions, since lenders can claim the forgiven debt as income that they provided you.

That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.

But there are two "outs," says Lohrenz. "If you meet the IRS' definition of insolvency at the time the debt was forgiven, then you generally don't have to pay taxes on it."

Or, if your home loan is a nonrecourse loan, you're also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral -- such as the house itself -- and the debtor would not have to pay tax on the sale shortfall.

The most common case is that mortgages secured by the property -- especially for buyers who made a 20% or more down payment -- is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don't dig a deeper financial hole as a result of the tax situation.

This story was reported and written by Tamara E. Holmes for Bankrate.com.