Here are 5 options you have if you want to avoid foreclosure.

1. Re-finance can be difficult due to the decline in real estate values. However, often a bank may offer a re-finance to pay off other high-interest debt like credit cards so that you will have enough income to pay your mortgage.
2. Short Sale - If you can prove financial hardship (loss of job, health problems, etc?) often a bank will allow a sale for a lesser amount than owed. Speak with a CPA as there are tax implication to a short sale.
3. Deed in lieu of foreclosure - an extended pre-foreclosure process (minimum 90 days in Arizona) is costly to the bank in terms of interest lost and potential decrease in property values. The bank may want to take back the home in exchange for release of debt by the owner so they can sell immediately. Again, ask your CPA about potential negative tax implications of a  Deed in lieu of foreclosure.
4. Loan Modification - banks have been asked to cooperate with the American Housing Rescue act to work with borrowers to keep them in their home as foreclosures significantly impact their bottom line.  If you are still able to make the majority of your monthly mortgage payment contact your bank with your financial information. They can reduce the interest rate (typically to 5%) and allow you to pay the new lesser monthly mortgage adding the difference to the principal of your loan.
5. Forbearance - If you are past due on monthly payments, yet cannot make up the accumulated missed payments, your bank may add those payments to your principal and allow you to pick up paying starting today. This is assuming you have the ability to keep paying monthly.

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