If such a situation occurs, you need to call your mortgage service collections department. If your deficit is temporary and you’ll be able to make the payments in the near future but not immediately, they may be willing to allow you to make partial payments till you can bring your account current. If the shortfall is due to some emergency, they may even grant you forbearance for three to six months, during which no payments are required. This will be possible if you can convince them that you will be able to resume full payments and bring your account current after that period. The effect of these options on your credit rating is minimal to moderate.
If you are not able to meet their payments at all, then you will have to take them up with the servicer's loss mitigation department. To save their investment, they may be willing to modify the terms of your loan, perhaps by removing some of the fees or converting it from an ARM to a fixed-rate loan.
If a foreclosure appears likely, the lender may offer to accept from you a deed in lieu of foreclosure, enabling them to take possession and sell the house, at their expense. They typically prefer instead to allow a "short sale," in which you sell the house for less than you owe, at your expense.
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