With the current housing market, most likely you’ve heard the terms “short sale” or “pre-foreclosure sale.”

If you’re having trouble with your current mortgage payments because of illness, loss of job, paycut or other hardship, you may want to consider a short sale.

A short sale is when the lender allows you to sell your home at fair market value, whatever that currently is, and yes, it may be much less than you owe on your mortgage. The idea is that continuing to pay on the mortgage is causing a permanent hardship and that if action isn’t taken soon, you could lose the home to foreclosure.

Most lenders will allow you to list your home with a realtor who will aggressively market the property. Of course, you will want to check with your lender to see what their pre-foreclosure sale procedure is, lenders may vary in what they require.

You can hold open houses and private showings, and you may even be able to advertise the home as a short sale candidate.

Once you have an offer in writing on your home, be prepared to send in a mountain of paperwork to your lender. You will most likely need to provide the written contract offer, the listing agreement with your realtor (and any marketing efforts your realtor has made), a complete accounting of your financial situation, bank statements, tax returns, pay stubs and more. A hardship letter may also be required. If so, be prepared to explain in detail why it is that you can no longer afford to keep the property and need to sell it.

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1. Pay Delinquency
If your financial situation changed quickly, and you missed a payment or two before landing back on your feet, then do not worry. Lenders are legally required to reinstate your loan if you pay off the delinquent amount. If you can borrow the money from a friend or family member then you can easily avoid foreclosure. You could even take out a small personal loan to pay off the delinquent amount. In addition, your retirement plan may allow you to take an early withdrawal in order to avoid foreclosure. Be sure to speak with your bank or financial planner to find out which method would be best for you.

2. Refinance
If you are current on your loan (meaning you have not missed any payments) then you may be able to refinance your loan before going into delinquency. Depending on your current interest rate, and the amount you owe on your loan versus your home’s value, you could greatly reduce your monthly payments.

3. HUD Partial Claim
If your loan is FHA insured then it may be possible for your lender to receive a one-time payment from the FHA Insurance Funds to cover your loan’s delinquency. However, before you get excited remember that in these tough economic times thousands of homeowners are requesting this type of assistance.

4. Payment Plans
If you recently lost your job, or had a reduction in pay, and missed a few mortgage payments then you may be able to negotiate a repayment plan with your lender. This is where you make your usual mortgage payment, plus an amount of the total delinquency amount. Repayment plan terms can be as short as a month or two, and as along as a year, and at the end of the term you would have paid off your total delinquency. Afterwards, your mortgage payments will go back down to the original amount. Depending on your lender, you may have to submit a full financial disclosure, and possibly even a good faith payment upfront to begin the plan.

5. Loan Modification
A loan modification will allow you to negotiate more favorable terms to your current loan, without having to begin foreclosure proceedings. You may be able to negotiate a reduction to your interest rate, or even a direct reduction on the principal amount of your loan. Although you can attempt to negotiate directly with your loan company, it might be in your best interest to hire a professional if you are serious about modifying your loan. Lawyers and loan modification companies have experience dealing with lenders and can often reach a better settlement than you could have on your own.

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