The number of foreclosures is at a record high, and looks set to balloon over the next few years.

If you’re in danger of having your home repossessed, the good news is that mortgage lenders are generally quite keen to negotiate a deal to allow you to keep it.

However, you do need to demonstrate that you are willing to work with them.

What Happens During a Foreclosure?

If your home is foreclosed, you will lose all rights to it no matter how much money you have put in to the mortgage, and you will have to move out.

The foreclosure will show up on your credit report for 7 years, and you might not be able to get any type of loan during that time. In addition, your credit score will take a hit.

In cases where the lender sells your foreclosed property for less than you owed them, they are permitted to take out a deficiency judgment against you. This means you have to pay them the difference, even though you’re no longer the owner.

The only state where you can’t be pursued for the balance of the loan is California – and that applies only where the mortgage has not been refinanced.

So, what are the Alternatives to Foreclosure?

1. Special Forbearance

Your mortgage issuer might be willing to set up a repayment plan to help you catch up with missed payments. This could even include a temporary lowering of your monthly mortgage bill, for instance if you have recently become unemployed. Of course, your lender will need to be convinced of your ability to stick to the new payment schedule.

2. Mortgage Modification

Another way to reduce your monthly payments is to ask the lender about refinancing your mortgage at a lower interest rate (contingent on market conditions) and/or extending the term of the loan. You might qualify if you’re getting back on your feet financially, but are earning less than before you defaulted on the mortgage. This arrangement could be either temporary or permanent. Check your mortgage documents first, though, to ensure that there is no penalty for paying off the initial loan early and refinancing.

3. “Hard money” Refinancing

If you’re fortunate enough to have a good amount of equity in your home (it’s worth a lot more than you owe), you could apply for a “hard money” cash loan secured against the property. This would give you a lump sum to pay for the months you’ve missed. The effect of a high interest rate is negligible since you are borrowing a relatively small sum compared with a complete refinancing loan.

4. Fannie Mae HomeSaver Advance™

Ask your lender if your mortgage is owned by Fannie Mae. If it is, you might qualify for an unsecured personal loan that will enable you to make up for delinquent payments.

5. Partial Claim

Your lender might be able to apply for a partial claim on your mortgage from the Department of Housing and Urban Development (HUD). If so, HUD would make a payment to the lender to get your mortgage up to date. HUD would also grant you an interest-free loan that you would pay back over an agreed period. To qualify, you must be at least 4 months, but no more than 12 months, behind. Also, your mortgage must not be in foreclosure.

6. Pre-foreclosure sale (short sale)

This means that you sell the house or apartment for less than the value of the mortgage, with the agreement of your lender. In some cases lenders are willing to take a loss, and to release you from your obligation to pay the loan balance, in order to get the mortgage off their books and not have to foreclose and be saddled with the property. This would preserve your credit rating, but remember that you would have to find somewhere else to live.

You might qualify if the appraised property value is at least 70% of what you owe, and the property sells for at least 95% of the appraisal. You also have to sell the home within 3 to 5 months (depending on the lender’s stipulations), and to have missed at least 2 months’ payments by the sale closing date.

7. Deed-in-lieu of Foreclosure

If it’s taking a long time to resolve your mortgage default, it’s possible that your lender will allow you to “give back” the property and walk away. This way, you avoid the hassle, stigma and credit issues associated with foreclosure, but you do still lose your home. Lenders generally see this as a last resort, though, since they would really rather avoid having to become property owners.

Most mortgage lenders would prefer to conduct a short sale in this situation, particularly if they believe they could go after you to cover any shortfall. Even so, you might be able to hand over a deed-in-lieu if all other options have failed, you have tried to sell without success, and you don’t have any other mortgage in default.

8. Walk Away

As the mortgage crisis continues to escalate, an increasing number of people are becoming so desperate that they are simply abandoning their homes, suspending their payments and mailing the keys back to their lenders (known these days as “jingle mail”).

This is definitely not a good idea. Your lender will most likely foreclose on you, your credit report and credit score will suffer, and you will not get another mortgage for the next 7 years. You might also find yourself facing a deficiency judgment, where you have to compensate the lender if they sell your home for less than the mortgage (this doesn’t usually apply in California).

If you’re lucky, you might be offered the chance to sign over the property with a deed-in-lieu, but there is no guarantee of this. Another important point is that you need to remain at your address to qualify for mortgage assistance, refinancing or repayment plans – so don’t burn all your bridges by walking away!

If losing your home has become inevitable, it is really better to try to reach an agreement with your lender to avoid any nasty surprises that could make a bad situation even worse.