What If I'm Behind On My Mortgage?
Many Americans have been going through a difficult time over the last few years. Life can be very stressful if you, or a member of your household, have lost your job or taken a cut in pay. If you are in trouble on your loan, there are multiple options available to you, both to keep your house and to get out of your situation altogether.
No matter which path you choose to take, you have to be smart, patient and persistent if you want the best possible outcome. Pay attention to what the lender is asking for and get it to them immediately. It's not unusual for a lender to close down a file on a request for assistance, if they don't receive requested information within seven days. If your file is closed, send the information anyway, and then immediately contact the lender and request that your file be reopened.
There are several possibilities if you decide that you want to get out of your situation completely. The ideal scenario would be to sell your house for enough money to cover what you still owe on the property. It's important that a proper Competitive Market Analysis be completed to determine if this is a realistic possibility. Pricing your property too high will make it more difficult to sell, even if later on you drop it to the current market value. You may lose money, and have a more difficult time negotiating with your lender if needed.
The second option is to sell your house for less than the amount owed, and pay the difference out of pocket. The advantage of this is that it will protect your credit. If you can afford to do it, it may prevent costly issues later on in many aspects of your life. Credit problems caused by mortgage issues can make ALL financing more expensive. It could affect your ability to purchase a car, get a credit card (or one with a decent interest rate), and could in a few cases affect employment options.
If you can not sell your house for enough money to cover the balance of your loan, and are not able to pay the difference, another option is a Short Sale. In a short sale, the lender agrees to accept less than the full amount owed on the loan. This sometimes necessitates difficult negotiations with the lender. There can be additional complications if there is a second mortgage on the property. Lenders will normally require that the house be listed with a real estate agent, and the house can not be sold to a family member, nor rented back to the seller. Though sometimes difficult, many lenders are finally beginning to recognize that they will lose more money in a foreclosure than they will in a short sale.
A short sale WILL damage your credit, but the recovery period is much shorter than it is after a foreclosure. The lender may forgive the unpaid balance of the loan, but that is not guaranteed. It may be necessary to negotiate with the lender to avoid having a judgment placed against you, or being forced to sign a promissory note for the unpaid amount.
If you are doing a short sale, you must stay cooperative. If you've sent information five times and they ask you to send it again, then send it right away. If you get defiant, you will lose, and you will be hurting yourself, not the lender. It's also important that you keep records. You will probably need bank statements (not the online printout), pay stubs, tax returns, profit and loss statements for any self-employment, proof of any other income and other documents.
If the short sale is ultimately unsuccessful, especially if you are unable to find a buyer, you may request a Deed In-Lieu-Of Foreclosure, where you agree to return the title to the lender in exchange for the forgiveness of the remaining debt. You may be tempted, out of frustration, to let the property go into foreclosure. This should only be done as a last resort, especially since you have a lot of options before getting to this point.
Lenders have also taken steps to make strategic defaults more difficult, where the homeowners deliberately stop making mortgage payments, even when they can afford them. This can have greater credit implications down the road, because the borrower has just made a decision not to honor their commitments. Lenders can also take a borrower back to court and go after other assets to get the rest of the money owed (This is also why it's a bad idea to trash your house before the foreclosure sale).
If your lender at any point forgives part of your debt, your troubles are not necessarily over. The Internal Revenue Service regards forgiven debt as income. In other words, if you borrowed $300,000, but only paid back $200,000, that's $100,000 in income, regardless of the value of the house. It doesn't matter that you don't have the house, or the money.
By 2007, the rising numbers of foreclosures and short sales, meant that more and more borrowers were being caught in this situation. To deal with this, Congress passed the Mortgage Forgiveness Debt Relief Act in December, 2007. The law exempted a homeowner from paying tax on this forgiven debt from 2007 to 2009 for their principal residence. The following October Congress extended the exemption through the end of 2012. The exemption only applies to a primary residence, not investment properties. To qualify for this tax benefit, you must fill out a form 982. The form and requirements can be found at www.IRS.gov.
©Copyright 2011 Douglas R. Barry