When you are behind in your mortgage and unable to keep up payments there are four basic options as solutions:

Loan Modification
You don’t want to lose the house; you just need to reduce your monthly payment. You can approach your lender directly, discuss the issue and, hopefully, agree on new terms. Typical loan modifications adjust monthly payments, interest rates and the term of the loan. There are credit rating hits involved if the principal balance is reduced or missed payments are forgiven.

However, the fact that you are in financial trouble makes the lender very cautious. They are going to look carefully at your ability to meet the new loan terms. You should be sure that you understand and really can meet those terms.

While well-intended, the successes of loan modification programs have been pretty miserable. In a high percentage of cases the modified mortgage goes into foreclosure within the next two years.

Short Sale
Often you need more than just a loan modification, you need to get out from under the loan altogether. The problem is you can't sell the home because the home is worth less than your mortgage balance and you don’t have enough money to make up the difference.

You want permission from your lender to sell the home for current market value and to accept that amount in full satisfaction of the amount owed. You also want to minimize the hit to your credit report and minimize the time before you will qualify for another home loan.

You can't do this alone. You need a professional Short Sale Realtor’s help with this. Your neighborhood banker is not going to make this decision, it is going to be approved or denied in corporate banking departments handling hundreds of such requests every month. This is where you need a Realtor experienced and trained in short sales. They will know who, when and how to push to expedite your sale without it getting shuttled aside.

You benefit emotionally, financially and reputationally by  working through a short sale. As you can imagine, there is a definite social stigma to having been foreclosed upon vs. a short sale. Instead, you retain the dignity that goes with rationally working through the sale of your home. 

You avoid the embarrassment of having public notices in the newspaper and postings on the property itself. Unless you tell friends and neighbors otherwise, it looks like a regular home for sale.

Literally millions of home mortgages are underwater. Today there is little stigma attached to homeowners who face up to the facts and work in partnership with Realtors and lenders to resolve the problem for all concerned.

This responsible behavior on your part will result in a much better credit report, often allowing you to buy another home after two years.

A major difference between a short sale and a foreclosure is that your lender must approve the sale price and terms. These days lenders can be  overwhelmed with requests. We can't emphasise enough the value of an experienced Short Sale Realtor in expediting this process.

The short sale itself can take several months; however you have the benefit of living there during that period, though it must be kept ready for showing by your Realtor.

Bottom line: Short sales are complex but the right Realtor can handle the details and you get to live there without the stigma of foreclosure. In most cases you will be entitled to  $3000 relocation assistance once the sale closes.

Deed in Lieu of Foreclosure
Rather than letting your home go through the foreclosure process, you surrender ownership to the lender, thus handing over the deed. This is treated as a foreclosure or bankruptcy on your credit report but spares you the embarrassment of the public notice postings and auction process. Deeds in Lieu of Foreclosure generally stay on your credit record as a foreclosure for ten years and you will be ineligible for a conventional home loan for seven years.

 Involuntary Foreclosure, Bankruptcy
You stop paying on your loan and “let whatever happens, happen.” You may or may not continue to live there until evicted. The home is still yours to live in until the foreclosure process is finalized. This can take many months, sometimes more than a year. Eventually the lender completes the formal legal foreclosure, usually with public notices in the newspaper and postings on the property itself. The lender eventually forces you out and sells your home at public auction. Foreclosures generally stay on your credit record as a foreclosure for ten years and you will be ineligible for a conventional home loan for seven years.