On the Brink of Losing the House -- and the Down Payment

They should also try to generate more income either by taking on part-time jobs or renting out a room in their house.

Now, on to the mortgage.

Diane Cipollone, an attorney and director of Civil Justice's Sustainable Homeownership Project in Baltimore, said that for now, their down payment is gone. A loan modification, she said, is the only way they can salvage their equity. "That will allow them to remain in the home. If their property value increases over time, they may possibly regain some or all of their lost equity," she said.

But it is a long and arduous process, and many times, lenders do not agree to it. Part of the problem is that many mortgages were bundled together and sold off on Wall Street. If that is the case with Chavez's mortgage, "it will be very difficult to figure out who really owns" the mortgage, said Karen Schaeffer, managing member of Schaeffer Financial in Rockville.

"But if it is still in the local lender's portfolio, they should be able to work directly with the lender on structuring a more realistic loan," she said.

They should also look into a short refinance, which would involve their lender forgiving the $185,000 that the house has lost in value and refinancing the rest.

A similar but the least desirable scenario would be a short sale. The lender lets the owner sell the house at a loss and then forgives the debt. There is no way the Chavezes would get any of their money back this way, but at least they would avoid foreclosure. But like a modification, it is not easy to do.

"A short sale requires investor approval, and there is no guarantee that the investor, i.e. the owner of the loan, will agree to the price offered by the potential buyer," Cipollone said.

Homeowners should list their homes only with real estate agents who are experienced in short sales. They should also have an attorney guide them through the process.

One important thing to keep in mind with a short sale or short refinance: You might end up with a big tax bill. "A homeowner faces potential income tax consequences if these transactions result in the 'forgiveness of debt,' " Cipollone said.

So talk to a tax attorney or accountant.

Chavez and her husband should also reach out to the many community and nonprofit organizations, such as ACORN and NeighborWorks America, that have helped beleaguered homeowners. Hope Now is an alliance of counselors, servicers, investors, and other mortgage market participants.

Because they live in Maryland, Cipollone said they should call the Maryland HOPE Hotline at 1-877-462-7555 and visit http://www.mdhope.org to find out the state's foreclosure prevention resources.

Lastly, Cipollone said, they should remember this: "All homeowners should ignore solicitations and Web sites that promise or guarantee to save their homes and should not pay up front for any such promised outcomes."