Facing Foreclosure? Take These Steps

Foreclosures in July 2007 were up 93% from July 2006, according to RealtyTrac, fueled by the weak housing market and numerous subprime, adjustable-rate mortgages resetting to higher rates that homeowners can't afford.

The effects of the credit crisis that has seized U.S. financial markets in recent weeks are not the only culprits. Homeowners who lose their jobs or are saddled with unexpected medical bills face sharp losses in their incomes, rendering them unable to keep up with mortgage payments.

The consequences are dire. Aside from losing their homes, people who face foreclosure earn a black mark on their credit that can hinder their ability to buy -- or sometimes, even rent -- another home in the future. If you find yourself in a position where making your mortgage payment may not be possible for any reason, here are the basic steps you need to take right away:

1. Act Quickly

The most important thing is to act quickly. That means taking immediate action when you first see an issue arising and not waiting until you are already behind in your mortgage payments. The sooner you realize a problem is coming, the more options you will have to address the cash-flow inadequacy that is causing the trouble.

2. Talk to Your Lender

Your lender doesn't want you to default on your mortgage any more than you do. The earlier you can let your lender know that there may be a problem in making mortgage payments, the more time you will have to negotiate a solution.

If your lender doesn't hear from you and you stop making payments, it could assume that you have already decided to walk away and will begin foreclosure proceedings as soon as it can, in order to cut its losses. If you contact your lender before missing the first payment, then the lender will likely be much more receptive to whatever problems you are having by the mere fact that you have taken the initiative to work out a solution.

While your lender won't be able to work miracles, it will be much more willing to negotiate a loan modification if you can show that you are taking the needed steps to correct the cash-flow problem and will be able to continue to pay your mortgage in exchange for some immediate help. If you are in need of a negotiation because of an unexpected hardship, you will need to show proof of this. If you do negotiate a loan modification, be sure to document all conversations with the lender, who you spoke with and the terms of any agreements. This will help ensure that the terms aren't changed on you over time.

If negotiations don't work with your current lender, early action also gives you the option of trying to find another loan. While this may be difficult, you have a much better chance of securing a new loan if all your mortgage payments are current. If you have missed any of them and foreclosure proceedings have been initiated, it will be nearly impossible to find any other lenders willing to make you a new loan.

3. Form a Plan

Before you rush off to cut as many expenses as possible and look for a second job, take the time to sit down and form a comprehensive plan on how you are going to manage to make the mortgage payments over the long term. If you can't come up with a viable plan to reliably make the payment each month, then you likely have more house than you can afford. In this case, don't bother cutting expenses to the bone or looking for additional work, because this will only delay the inevitable.

4. Increasing Income

Getting a second job is not always the best option. Depending on your situation, you may be able to earn extra money by renting a room or a portion of your house. You are better off doing this and spending time taking classes and increasing your skills to someday qualify for a higher-paying job, rather than working two jobs.

5. Cutting Expenses

Most people have quite a few expenses that they can cut. If, however, you are forced to cut all expenses to the bone just to make the mortgage payment possible, this is another sign that you bought more house than you can afford. If you can't spend a cent on anything else but your mortgage, serious thought should go to selling the house and getting one that is affordable at your income level.

6. Consider Selling

If you are not able to form a plan that will enable you to reliably pay your mortgage each month, then you should consider selling. Even if you must take a loss on the house, this is a better option than trying to hang on to a house that will eventually drain all your money.

Since selling a house takes time, this is yet another reason why it's essential to take action at the first signs of trouble. If you decide to sell, let your lender know that you are selling because you won't be able to make your mortgage payments. If the lender knows what you are trying to do, it may be willing to stop any foreclosure action for a specific time period while you attempt to sell the house.

When it comes to your mortgage and the possibility of not being able to pay it, the worst move you can make is to do nothing. Coming to terms with the difficult choices that need to be made may not be enjoyable, but the sooner you do, the better off you will be in the long run.

Should you refinance? Crunch the numbers with the help of on TheStreet.com.