If You Can't Pay Your Mortgage

What steps should you take if you find yourself unable to pay your mortgage and believe you might be heading toward default?

*"Immediately contact your lender," says Michael Drawdy of Weyerhaeuser Mortgage Company, in Woodland Hills, Calif. Call as quickly as possible, to minimize losses. Don't be afraid to call, because if worst comes to worst, the lender will find out and then contact you.

*If there is a genuine hardship, let the lender know. Examples include unemployment, medical bills or physical problems, and divorce or other family difficulties. A declining property value, however, is usually not considered a "hardship," in and of itself.

*Seek to work out an alternative payment, such as a modification of your original loan terms. One possibility is to make half a payment, instead of the full amount. Some lenders, experts note, are even willing to consider changing the interest rate on the mortgage to lower your monthly payment.

*Consider a "short sale," which has become very popular in California. In such a transaction, the lender lets you sell the house at a price below the value of the amount due on the mortgage. The advantage is that the lender gets a return of a substantial portion of the amount still owed; the borrower, meantime, often winds up staying in the house longer than would have been the case had there been a foreclosure, since it usually takes some time to effect a sale.

*If you go to a short sale, find a real estate company experienced in that approach, Mr. Drawdy says. List the house at market value, not the amount of the loan. The broker will often be willing to reduce the sales commission, because the house is priced to sell.

If a third-party lender offers to take over your loan for a fee, be wary, he says. The original lender may offer the same things without charging you a fee.

*Be forthright in sharing losses - or any revenue gains - with the lender. Failure to disclose key information can quickly turn the lender against you. An open relationship with the lender, meanwhile, can build trust during a difficult situation for both parties.

*Second of two articles on home ownership. The first ran Aug. 20.